How Did The Chip Shortage Happen, and is it Going to End After 2 Years?
As most of the industries are becoming reliable on electronic chips, the demand for semiconductors is rising exponentially with the world’s tendency toward digital transformation. With the beginning of the Covid-19 pandemic in early 2020, and as the automotive industry sales plunged all over the world, automotive manufacturers had to stop their chip orders and terminate production. But when the demand for vehicles started to recover, automakers found themselves in a forceful race over electronic chips. With millions of people all around the world working at home, the demand for smartphones, laptops, and other consumer electronics increased significantly, all of which led to the growth of demand for semiconductors. This magnitude is reflected in the growth rate of the industry as the semiconductor revenue rose 25% in 2021 with a total of US$583.5 billion according to Gartner. It was the first time the industry crosses the US$500 billion threshold. However, with the increase in demand comes a shortage in supply. As per the U.S. Commerce Department, the median inventory of semiconductor products highlighted by buyers has fallen from 40 days in 2019 to less than five days in 2021. Thus, lead times for multiple semiconductors were close to 52 weeks causing manufacturing delays and losses of hundreds of billions of dollars. Deloitte noted: “Considering that chip shortages are likely to last through 2022, everybody should be prepared for longer lead times and possible delays. The extent of these will likely vary by industry and application”.
As the use of semiconductors in automotive industries is growing fast, automakers are the main players that are affected by the shortage. Automakers were forced to slow their production rate as well as cease production in certain factories due to the lack of chips.
The automotive industry has lost around 10 million vehicles and more than USD $200 Billion in sales in 2021 according to AlixPartners. Lately, key manufacturers such as Ford, General Motors, Porsche, and Toyota were forced to cut some of their vehicle features due to the lack of the related electronic chips. For example, BMW removed touchscreen functionality and its Park Assist system from more than a half-dozen models, and General Motors deleted heated and vented seats on several SUV and truck models. Although automotive manufacturers predict that a near two-year chip constraint will ease in the second half of 2022, chipmakers like NXP and Infineon forecast that the squeeze on electronic chips will remain in the year 2022 despite the increase in production rates. Infineon estimates that the supply-demand balance would improve in the 3rd and 4th quarters of 2022, yet mature chips that are crucial for auto manufacturers will stay short until the beginning of 2023. “Supply limitations are far from over and will persist well into 2022,” Infineon CEO Reinhard Ploss said during an investor call. On the other hand, Tesla Chief Executive Elon Musk had a different perspective. Elon said during an interview call last month the shortage was not a long-term issue as automakers are guilty of panic buying of chips which slowed the supply chain. He added: “I think there’s some degree of the toilet paper problem as well, where, you know, there was a toilet paper shortage during COVID, and like, obviously, it wasn’t really certainly a tremendous enhanced need for a** wiping. It’s just people panicked…”. The ongoing situation has urged political and tech leaders in the world to try to improve the semiconductor industry. The shortage has shed the light on the U.S. stakes in the industry and how the manufacturing process has largely moved outside the country into Asia. With the acknowledgment of the need of having more local fabs, American organizations like Intel and Texas Instruments are investing in new multi-billion-dollar projects in coming years. The European Union also announced its plan to overcome the dependency on Asian computer chip makers with a USD $48 billion investment. “There are a couple of the fabs that are going to come online towards the end of the year that will help those markets but not fully solve the problems,” said Peter Hanbury, a partner at Bain & Company. Nevertheless, the technological advancements in developing such facilities stand in as a long-term solution, as a chip factory takes a couple of years to build and another couple to get to maximum capacity. Yet, semiconductor makers, distributors, and suppliers will face a bigger challenge: the boom-and-bust cycle. “Historically, every shortage has been followed by a period of oversupply, resulting in falling prices, revenues, and profits,” according to Deloitte. In light of the challenging chip sector circumstances, several questions arise in terms of the main players’ manufacturing strategies, and how chip users are going to react to optimize the supply chain.