Semi-Conductor Crisis, What is it? & Why does it matter?

Turn to the business section in a newspaper and you would often see an update or two about semiconductor chips – be it the latest development in technology, the Government’s newest policy to promote in-house manufacturing, or more recently, the ongoing global semiconductor chip crisis. Understandably, one might not give this issue a second thought before turning the page over to the more interesting sports section. I mean, how do semiconductor chips matter to us anyway, right? They do. Immensely. In this day and age, semiconductor chips (SC) make our world run, and this isn’t hyperbole.?

So, what are they and why are they so important?

Also known as a microchip, semiconductor, processor or integrated circuit (IC), a chip is an impossibly small piece of silicon, usually a few hundred square millimetres — the size of a fingernail. They are used to control the flow of electricity and are embedded in most things around you — rice cookers, washing machines, X-ray machines, cars, phones, laptops, gaming consoles, LED bulbs, ATMs, trains, etc. Any electronic device that uses electricity and/or connects to the internet in today’s world needs a semiconductor chip (SC) to operate.?So, the day all SCs in the world stop working, not only would our daily lives be affected, but the global economy would be halted irreparably.?

Okay, so now that we know SCs are important, what do we have to worry about?

Unfortunately, quite a lot. The world is undergoing a shortage of semiconductor chips. The growing demand is greatly outstripping supply. Per the law of demand, reduced supply has led to an increase in price. This has negatively impacted more than 169 industries across the world. However, the ultimate impact is felt by the customer, since manufacturers eventually pass on the cost pressure. For example, laptop prices in India have risen 2-3 per cent every month for the past 7-8 months. According to News18, Xiaomi’s Redmi Note 10 has seen five price hikes since its launch in March 2021. Noida-based Coral Telecom makes equipment used by BSNL, Airtel, the Indian Air Force and the Indian Army. Mr Rajesh Tuli – the managing director – said ordering and procuring a chip for more advanced processors, which used to take 45 days to three months, is now taking up to a year. This wait time is translating into customer queues across several industries, such as consumer electronics (smartphones, laptops, gaming consoles), the auto industry and home appliances (microwaves, fridges). Around 40% of the components that are used in cars are electronic and require a chip to function. For instance, airbags have a sensor that sends signals through a chip. Similarly, the dashboard readings, the car engine and tyre pressure monitoring are powered by chips. India’s largest carmaker by deliveries, Maruti Suzuki, has cut production by 60% at its Haryana and Gujarat plants since the month of October due to a lack of chips. However, according to Navkendar Singh – research director at IDC India – products like laptops, personal computers and TVs are the ones likely to be impacted over the longer term.

So, what caused this shortage of chips?

The root cause of this crisis is very basic: demand is so great that existing production capacity can't keep up. However, the situation is exacerbated due to a combination of different events, especially with the snowball effect of the COVID-19 pandemic accelerating shortages. For example, an increase in remote work and remote learning caused a surge in demand for computers, network peripherals, and other consumer electronics with chips. Due to lockdowns, chip production facilities were shut down, leading to the depletion of inventories. Moreover, some experts attribute the 2020 US-China Trade War as another agent of this crisis. For example, in September 2020, the US Department of Commerce imposed restrictions on China's largest chip manufacturer, Semiconductor Manufacturing International Corporation (SMIC), which made it harder for them to sell to companies with American ties. These restrictions forced companies to use other manufacturing plants like Taiwan Semiconductor Manufacturing Company Limited (TSMC) and Samsung. However, these companies were already producing at maximum capacity. Yet another cause was a string of incidences of elemental origin. For instance, in February 2021, a severe winter storm forced the closure of two plants in Austin, Texas owned by Samsung and NXP Semiconductors, setting back supply from these two plants by several months. Similarly, Taiwan is the leader of the global semiconductor industry, with TSMC alone accounting for more than 50% of the global wafer foundry market in 2020. In 2021, Taiwan experienced its worst drought in more than half a century, leading to problems among chip manufacturers that use large amounts of ultra-pure water to clean their factories and wafers. In March 2021, a Japanese factory owned by Renesas Electronics, which supplies 30% of the global market for microcontroller units used in cars, caught fire. In January 2022, a fire from the Berlin plant of ASML affected the production of EUV lithography equipment used in chip production. These isolated incidents greatly affected what is a highly integrated global supply chain of semiconductor chips.

Most recently, the Russian invasion of Ukraine has heavily impacted the global SC supply chain. The price of neon, a noble gas needed for lasers in chip manufacture, increased sixfold between December 2021 and March 2022 due to the COVID-19 pandemic and political tensions in Ukraine. Ukraine produces about half of the global neon supply. Russia exports about 40% of the global supply of the metal palladium, used in certain chip components, and the supply of palladium could be affected by trade sanctions imposed by Western governments.

This crisis has highlighted the drawbacks of a globally integrated supply chain, where production issues in one part of the world can have commercial ramifications halfway across the globe. In light of these revelations, countries are taking steps to achieve self-reliance in SC manufacturing. In March 2021, US chip leader IBM said in a note, “You never want to be in a spot where another nation can control a valuable resource that your nation depends on.” As if on cue, the US Government allocated $50 billion for advancing semiconductor R&D and domestic production of semiconductor chips. Similarly, the Indian Government, under the umbrella initiative of Make in India, launched the Scheme for Promotion of manufacturing of Electronic Components and Semiconductors (SPECS) to financially incentivise domestic production of these tiny electrical powerhouses by providing an incentive of 25% on capital expenditure.

Semiconductors are the lifeblood of modern technology products. The innovative devices produced by semiconductor companies enable everything from life-saving medical research to increased workplace productivity, green technology, and connectivity among people around the world. As semiconductors have become smarter, faster, and more efficient, they promise to deliver even more life-improving capabilities. Unfortunately, according to Stefan Hartung, Chairman of automotive components major Bosch, the worst of the semiconductor crisis may not be over yet. How the semiconductor chip shortage pans out shortly, and how do countries and companies cope with it, remains to be seen.