COVID-19 and the Global Chip Shortage

 written by 10223 Choi Jae Hyuk

 

The COVID-19 pandemic has been pestering the world for quite some time now, and its effects are still seemingly unwavering. This is only worsened by the pandemic’s inconvenient side effects, which began to materialize shortly after its beginning.

 

With every government calling for improved hygiene, shortages of personal protective equipment and medical facilities were expected as the number of patients grew exponentially worldwide. However, scarcities caused by misled panic buyers, such as toilet paper shortages, were rather unexpected and received a lot of media attention. 

 

Now another unanticipated shortage threatens our livelihoods, this time a lot more serious. The global chip shortage is expected to continue producing electronic devices, small or big, very difficult for the foreseeable future.

 

How Things Went Down 

 

The chip shortage has many causes, but most notably, it began after a sudden increase in demand for semiconductors recently.

 

After the pandemic began, many businesses and factories were forced to slow down to meet the social distancing guidelines. Regrettably, many people stayed at home and began upgrading their electronic devices for entertainment and online communications around the same time. In turn, as the demand for these products grew prompting chip designers to place more orders than what the manufacturers could fulfill, which brought about the onset of the deficit. 

 

Other causes have been attributed to the trade war between China and the U.S. that began in 2018. The U.S. government placed restrictions on China’s largest chipmaker SMIC last year, forcing companies to use alternative manufacturers which were already overwhelmed by an excess of orders. 

 

 

The Outlook

 

Manufacturers are attempting to ramp up production by building new facilities but establishing semiconductor factories is not immediate. New facilities take about two years to be fully operational, not to mention the hefty cost of several billion dollars. 

 

According to Reuters, CEO of European chip manufacturer STMicro, Jean-Marc Chery, expects semiconductor manufacturing to return to normal production gradually throughout 2022, but no sooner than the first quarter of 2023.

 

Chip shortages are already causing delays in the production of next-generation video game consoles as well as various processing units and smartphones. Sony expects its new console, the PlayStation 5, to remain in short supply throughout 2022 or longer. 

 

Chip designers such as AMD, Nvidia and Apple are also facing a shortfall of supplies. 

 

Computer components such as graphics cards have been increasingly difficult to acquire as the cryptocurrency mining craze converged with the chip shortage. 

 

Though Apple reported better sales than what the investors were expecting in July, CEO Tim Cook commented in a call that they expect supply constraints that will affect sales during the third quarter this year according to CNBC. 

 

The deficit is not limited to high-end, high-performance chips. The simplest and cheapest ones are low on stock as well, affecting a concerningly wide range of industries. Among the hardest hit was the automobile industry. 

 

Consulting firm AlixPartners predicted in September that the global auto industry this year will produce 7.7 million fewer vehicles than planned. The semiconductor shortage is expected to cost the automotive industry a total of $210 billion in 2021. 

 

Global chip manufacturers such as TSMC, IBM, STMicro and Intel agree that the lack of supply will not come to an end anytime soon. As a result, large semiconductor companies such as Intel and TSMC have all recently announced that they are actively investing in the construction of new foundries. Still, they won’t be finished until the end of 2022 at the earliest. 

 

The Bullwhip Effect

 

Another unfortunate fact is that economists are concerned that the expansion of chip factories proposes more problems later on. 

 

Soon after the expansions, the chip shortage will come to an end, which means that the supply and demand of semiconductors will stay nearly equal from that point onwards. In this risky state, only a minor increase in consumer demand could bring about yet another market failure. 

 

This economic phenomenon where even a small change in demand affects the whole supply chain tremendously is known as the bullwhip effect. Since consumer demand is quite impossible to predict, sellers must forecast how much they need to keep up with the market demand. During this process, they naturally make slight misjudgments when making orders to the manufacturers. As these mistakes pile up moving further up the supply chain, the magnitude of rather small miscalculations in demand grows immensely, overwhelming the manufacturers and resulting in sudden shortages. 

 

There are many things that can further intensify the effects of the undersupply, such as disorganization or slow and inaccurate communications. Another critical factor is known as panic buying, also known as hoarding supplies.

 

Just like those panic buyers we may encounter in supermarkets, corporations are attempting to hoard chips to last through the crisis, trying to get ahold of as much as they can in order to prevent losing market share to their competitors. They believe that if they can stockpile enough supplies before the others, they just might be able to make it through without risking losses. Unfortunately, this behavior places significant pressure on the manufacturers who were already incapable of keeping up with the existing orders.

 

Therefore, semiconductor producers are required to wisely and carefully manage the supply all the way through the shortage. They must make rational judgments and evenly distribute their stocks to each industry sector in order to avoid escalating the magnitude of the deficit. Correctly guessing how much supplies their customers truly need to meet their demands and limiting sales to only that specified amount is of utmost importance. Through supply management, the world can be safely guided out of the chaotic shortage into market stability.