What caused it and how will this impact you? Impact of semiconductor chip shortage on global economy A global worry has popped up on the scarcity of semiconductors. Today, millions of products - cars, washing machines, smartphones, and more - rely on computer chips, also known as semiconductors. And right now, there just aren't enough of them to meet industry demand. As a result, many popular products are in short supply.
As the pandemic unfolded, early signs of fluctuating demand led to stock piling and advance ordering. People working from home have needed laptops, tablets and webcams to help them do their jobs, and chip factories did close during lockdowns. These chips perform various functions in modern products such as powering displays and transferring data.
A shortage in chips created a manufacturing hurdle and a supply chain disruption globally.
Taiwan Semiconductor Manufacturing Corporation (TSMC) is the world’s largest contract chip maker, whose customers include Qualcomm, Apple, etc. It holds 56% of the foundry business of manufacturing chips. The surge in sales for electronic devices during the pandemic created a huge demand for semiconductors. Not only Covid, other events like geopolitical tensions, lack of new capacities, limited stocks, among others triggered the crisis.
While TSMC is ramping up production, it also called for Malaysia’s help to address the global problem. Currently, Malaysia is one of the top 10 countries in the semiconductor industry, accounting for about 7% of the global chip trade. The bottleneck is that in Malaysia for a while the factories were all shut down due to pandemic. However, Malaysia started to restore production capacity in early September, and now the production capacity has returned to about 80%.
Establishing new chip factories is difficult to do quickly. It's extremely expensive and requires a well-trained workforce as well as complex processes.While government cleared some PLI schemes for manufacturing, it will take time before PLI initiatives show significant results, particularly in manufacturing semiconductors. Moreover, Taiwan, China and South Korea – who have been global players since years, are already racing to meet demand, and will likely dominate in the future.
The auto industry is one of the most severely impacted. Some domestic and global auto manufacturers have had to cut output or temporarily halt production due to the shortage. Last month, Maruti Suzuki reported a 66% year-on-year decline in consolidated net profit in the second quarter of FY22, impacted by the ongoing chips shortage. The company said that the adverse impact on production will continue in November too.
Demand for chips varies by the node size. Chips in the nano size are generally used in leading-edge technology apps, not required by many automakers. Now with the 5G rollout, larger node size chips as the auto chips will be required for these apps. That amount of overlap means that as the rollout of 5G occurs over the next few years, automakers might continue to face scarcity of chips.
The pandemic accelerated an already difficult situation for chip makers. We're in the middle of a tech boom, supply can't quite keep up and it won't get sorted out overnight. However, steps are being taken by the companies and governments across the world to address the issue. Let’s wait and watch how the situation unfolds.
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