Global Chip Shortage is a pandemic induced disruption in the market for integrated circuits globally. The pandemic resulted in a voluminous surge in demand for electronic goods that employ, integrated circuits for their functioning.
Cause of Global Chip Shortage
The global chip shortage crisis which peaked during the pandemic is primarily a result of pandemic induced disruptions. As the world reeled under the pandemic and grappled with the adverse effects of lockdown, the economy abruptly was forced to transition from a brick and mortar form to a digital economy.
Subsequently, this resulted in a monumental spike in demand for electronic goods, where integrated circuits are an integral component for the functioning of the above. Consumers and businesses began purchasing new laptops and servers for work. Similarly, households started to purchase household devices that cater to entertainment like Tablets, Televisions, Gaming Consoles and Gaming Computers. The buying decision was not limited to the above. People, also purchased, smart health wearables and calorie counting devices to keep a track of their macronutrients and get in shape. The extended lockdown that was imposed across several countries presented an opportune time to get fit and healthy.
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Another driver of demand for electronic goods during the pandemic was the fact knowledge economy transitioned into virtual mode. The education sector went from physical classrooms to the front of laptops. This results in a spike in demand for laptops and other ancillary education facilitating electronic devices.
According to estimates from Semiconductor Industry Association, sales for semiconductors and integrated circuits for the month of May 2021, was 26% higher than what was observed for the same period in 2020.
Another probable reason for the global chip shortage is that the integrated circuit market is an oligopolistic market where the lion’s share of manufacturing is mainly done by two firms. They are Taiwan’s TSMC (Taiwan Semiconductor Manufacturing Company) and Korea’s Samsung. The sudden surge in demand was constrained by supply-side factors, as they could not expand their production beyond their maximal production capacity.
Another miscellaneous factor that contributed to the shortage of integrated circuits was a drought in Taiwan. Water is necessary to manufacture integrated circuits. Taiwan faced the worst drought that it has faced in over half a century. The above was a factor that contributed as well to the ongoing global chip shortage crisis.
The most affected sectors by global chip shortage
The automotive industry was particularly hit bad. Production lines across the globe were disrupted for weeks on end, without integrated circuits which affected the production capacity. North American automotive giants Ford and General Motors have announced a prolonged shutdown for their plants across America due to a lack of integrated circuits. It is estimated that the global chip shortage has resulted in an opportunity cost of $ 47 billion.
The video game console market was another sector badly affected by the global chip shortage. Sony warned that they were experiencing a short supply of integrated circuits. This drastically affected the supply of consoles like Play Station 5. Sony had to limit their supply of the console based on the geographical region to maximize their revenue as they were reeling under the short supply of integrated circuits.
The global chip shortage also affected the sales of gaming PCs and the graphics card market. Integrated circuits are an important component in the functioning of gaming PCs that enhance the graphics and give a superior gaming experience to the user. However, with the shortage in integral circuits gaming PC market and graphics card market was affected. It resulted in a drastic demand-supply mismatch in their respective markets.
What is being done to solve the global chip shortage crisis?
Analysts and market researchers have suggested that demand for semiconductors are to see an upswing in the near term. This is a direct result of more industries undergoing digital transformation. Manufacturers and governments are actively pursuing to add more capacity to their manufacturing facilities and supply chains.
For instance, Taiwan Semiconductor Manufacturing Company is adding $100m in capacity building programme over the next three years. Meanwhile, in Korea, the Korean government has pledged a $451bn programme to build investment in capacity for Korean chip manufacturers. Along similar lines, experts from the industry opine that, the source of semiconductor manufacturing to be diversified to avoid future disruptions in the supply chain. Joe Biden has given his word that he will incentivise and actively promote the semiconductor sector in the USA.
End of global chip shortage
Semiconductor supply was expected to return to normalcy in 2021. However, due to certain unaccounted factors, experts fear that this shortage can last till 2023. Current investments and capacity expansion will not result in an immediate tangible effect. The effects for the former to be felt takes up a considerable amount of time.
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