Why is the world facing a catastrophic chip shortage?

In 2021, the world is facing a shortage of microcircuits, which are used for the production of laptops and phones, cars, and household appliances. The main reasons are the pandemic and the trade war between China and the United States. In this blog, I will try to understand why large companies have permitted dependence on Chinese chipmakers, and whether millions of dollars of investment can accelerate the resolution of this deficit.

Let’s start with the reasons. The pandemic has triggered a high demand for electronic products, as well as “shutting down” large chip production in China and around the world. The trade war has also hit Chinese semiconductor manufacturers. The United States has banned technology transfers and ordering schemes from a former eastern partner. Then the producers began to experience the first production deficit. The order of microcircuits began to be transferred to Taiwan, South Korea, Malaysia, where large production facilities are also located. However, factories could not cope with such a volume. Demand exceeded supply. Why have Apple, BMW, WAG, Microsoft and other world leaders made themselves dependent on China?

The main reason is that it is more profitable and cheaper to outsource production to other companies than to do it yourself. No one foresaw the problem of limited capacity. There are only three major manufacturers of RAM chips in the world: Samsung, Micron and Hynix. If a chipmaker can’t keep up with demand, they just have nowhere to go. Also, the problem is that companies like AMD — a manufacturer of central and graphic processors — do not have their production. In 2009, the company closed production and is placing orders at the facilities of other organizations. And in a situation of shortage, outsourcing companies are simply physically unable to fulfil the orders of all customers.

Companies are abandoning their own production facilities because everything depends on billions of dollars of investments. According to a September 2020 report by the Semiconductor Industries Association, the United States produced 37% of the world’s chip shipments in 1990. Now the country accounts for only 12% of world production. It has become cheaper to build microcircuit factories outside the US as foreign governments offer more attractive financial incentives to build semiconductor factories — tax breaks and grants. Countries like Asia also have less regulation.

The manufacture of computer microcircuits is a complex process. It is also difficult and expensive to build new factories to manufacture the vital silicon component, which means companies have to rely on existing factories. A new semiconductor plant could cost up to $20 billion. Joe Biden is now aware of the problem and threats associated with overdependence on foreign production. As part of a $2 trillion infrastructure plan, $50 billion has been allocated to stimulate the domestic production of microcircuits. So far, the plan is at an early stage of implementation, but the United States can get visible results only in the long term. As for Ukraine, the deficit is just getting closer to us. Now we can feel it if we want to buy a new iPhone or order a car that will have to wait for several months.

Business calculates the economic benefits, and sometimes the consideration of political, environmental, emergency factors does not cover multi-year periods. Many companies are now in a difficult situation, and their investment projects in manufacturing could ease the situation in years. Let’s call it a lesson for the future, which is now costing millions.