How Companies Are Dealing With Chip Shortage And When It Is Expected To Improve?

Drought in Taiwan and then the wave of COVID-19 leached the supply of chips and then the boom on reopening of markets has caused a severe shortage of chips. Know what are companies doing to deal with this and when is the situation expected to improve.

The semiconductor industry found itself in an unaccustomed spotlight in 2021 when chip shortages first shut down automotive production lines. People suddenly became interested in the chips that power so many functions of cars, including interior lighting, seat controls, and blind spot detection. It's no secret that the chip shortage has been making the news for a while now. The attention intensified after some high-tech and consumer-electronics companies reported chip shortages or supply chain concerns. We live in a semiconductor world. But, how did we get to this point? The semiconductor sector generates significant economic value, but what lies ahead for it?

What is Semiconductor Chip?

The simplest explanation is that it is an integrated circuit or a computer chip. Typically, semiconductors are made from silicon, which conducts electricity, and are used to make chips. There are several components to a chip, including transistors, wiring, and silicon wafers.

It doesn't matter if this simple explanation is correct or not. What matters is the fact that semiconductor chips are becoming more complex. Chipmakers have developed smarter, more powerful, and smaller chips over the years, which decreased costs and improved profits and performance, but also made them difficult and time-consuming to make.

What Caused the Chip Shortage?

Multiple factors contribute to the chip shortage, but the COVID-19 pandemic is the primary culprit. A temporary halt in vehicle production was imposed by automakers at the beginning of the pandemic due to factory closures. Other electronics were also in high demand due to lockdowns and virtual work and school.

The number of TVs, computers, smartphones, gaming consoles, and appliances was increasing, which led to the need for more chips. The chipmakers began supplying more chips to meet the demand, and they shifted production to the newer, more profitable chips.

When automakers reopened factories and ramped up production, chip manufacturers were unable to supply them with enough chips, since electronics companies had all spoken for them. The chip manufacturers were also not producing as many legacy chips, and most cars weren't designed to incorporate the more advanced chips.

The rest of the electronics industry was willing to pay more for the chips, and they signed contracts for large quantities of the newer chips. The chip makers didn't make a lot of sense to revert to making legacy chips for automakers, as this would hinder their contracts with companies in the electronics industry.

A chip shortage was also impacted by the fact that newer products require more chips. In the early days of the pandemic, many companies released new and updated products in response to the surge in demand for electronics. Bitcoin and other forms of cryptocurrency, as well as political policies that affected China's trade, exacerbated the situation.

Chip shortage - Supply is Lesser Than Demand

Several factors contributed to the semiconductor shortage. Along with long-standing problems within the industry, such as insufficient capacity at semiconductor fabs, the COVID-19 pandemic introduced new challenges.

In early 2020, automakers cut their chip orders as vehicle sales plummeted. The semiconductor industry had already shifted production lines to meet the demand for other applications when demands recovered faster than expected in the second half of 2020. In 2021, semiconductor companies expected revenue growth of about 9% - up from only 5% in 2019, the last pre-pandemic year. Global supply-chain disruptions are also causing some governments to increase their investments in semiconductor technology.

Automobile chips are made using processes that meet different safety criteria from chips made for other industries. Automobile chips are made using processes that meet different safety criteria from chips made for other industries.

In the automotive industry, this challenge is complicated by the increasing reliance on electronics as regulations and consumer pressures make cars smarter. Also, the semiconductor industry uses only 5% to 10% of annual semiconductor production; consumer electronics use most chips. Automobile companies found themselves at the back of a long line as they began to restart idle assembly lines and ramp up production.

A 54 percent of installed capacity comes from lines producing chips at these old nodes, which were last cutting edge 15 years ago or earlier.

Typically, these old nodes are used on silicon wafers of 200 mm. The industry moved to 300-mm wafers in 2000 to reduce costs, but much of the old 200-mm infrastructure survived and was even expanded.

Although the auto industry is desperate, there is no rush to build new 200-mm fabs. According to the chip manufacturing equipment industry association SEMI, the number of 200-mm fabs will rise from 212 in 2020 to 222 in 2022, about half the increase expected for 300-mm fabs.

What Are Automakers Doing to Help?

For the most part, companies are grabbing whatever microchips they find and then building more adaptive manufacturing processes to cope with the challenges of this indiscriminate approach.

Great efforts are being made by automakers to deal with the chip shortage. They can't afford to lose loyal customers to rivals, and they don't want to lose money. Most brands prioritize using the chips found in their most profitable and popular vehicles. Meanwhile, they have temporarily halted production of less popular models and even closed some factories until they can obtain more chips.

Tesla and Ford have recently removed certain chips from their cars, but the vehicles can still be delivered to customers. These chips, or the parts that rely on them, will be installed at a dealer or service center once they're available. Some chips and related vehicle features were eliminated in other cases.

When a missing chip or related part becomes necessary - or if it poses a safety risk - automakers park the cars in lots until the chips arrive, then ship them to dealers. Some brands are shipping cars with missing parts to dealers due to overcrowded automaker lots. The cars will sit on dealer lots until the parts arrive, the dealers install them, and the cars can be sold.

Some automakers have made drastic changes to vehicles to do away with many of the scarce legacy chips and move forward with the newer, plentiful chips. The process is challenging to undertake during the production of a vehicle. Due to this, it's usually reserved for the most recent models or those that are completely redesigned.

When Will the Chip Shortage End?

It could be years before things are back to normal, even though the situation is improving. Fortunately, most experts agree that the chip shortage won't get worse. Despite the long road ahead, we've already rounded a corner, and there's light at the end of the tunnel.

Chip shortages will ease during 2022, but they may not be over until the second half of 2023. However, it is impossible to predict exactly what will happen. There are still many areas affected by COVID-19, and new variants are hard to predict. Commerce across the globe has also been complicated by the Russian invasion of Ukraine. It may take us until 2024 to get out of the woods completely, according to some experts.

In parallel with efforts to boost advanced logic chip manufacturing, national and regional governments are experiencing chip shortages. There is a $450 billion push in South Korea over ten years, legislation worth $52 billion is being proposed in the US, and the EU could invest up to $160 billion in semiconductors.

Bottom Line

Despite their hidden presence in many devices, semiconductors now play a more critical role than ever in everyday life for everyone, from schoolchildren to nursing home patients. This fact has been highlighted by the current semiconductor shortage, which has revealed how dependent the industry is on a well-functioning semiconductor supply chain. Innovations in semiconductor technology and a stable chip supply are key to some of the most exciting trends, such as autonomous driving, vehicle electrification, and artificial intelligence. These trends could turn the next ten years into "the golden semiconductor decade"-if stakeholders prepare now to take advantage of them.


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