January 21, 2022

Chip Shortage: Everything you need to know

The chip shortage is a buzzword that is thrown around a lot, but most people have no idea why there is a chip shortage or what a chip even is. 

These chips are Silicon chips or semiconductors that are used in any device that computes something: anything from a car to a computer to a TV. If it plugs into a wall or uses batteries, chances are that it has a chip. 

Car manufacturers have been hit particularly hard from the chip shortage as they’re needed for features like digital displays, entertainment systems and other aspects such as assisted parking.

A typical vehicle uses around 300 silicon chips, while an electric vehicle can have up to 3,000. According to consulting firm AlixPartners, the chip shortage is now expected to cost the global automotive industry $210 billion in revenue in 2021.

Since the requirement of backup cameras mandated by the National Highway Traffic Safety Administration (NHTSA) in 2018, every new car is guaranteed to have even more chips in them. 

Multiple automotive plants have closed due to a lack of chips from General Motors to Mercedes-Benz. 

The chip shortage began shortly after the start of the COVID-19 pandemic. A lot of automotive manufacturers canceled shipments of chips which prompted many chip manufacturers to sell their supply to markets that were booming during the pandemic such as to computer and mobile device manufacturers. 

And as remote work became the standard, more companies and people needed laptops, webcams, mobile devices and other devices. Demand was high and the automotive manufacturers were no longer a high priority.

Car lot of vehicles waiting for chips. Photo courtesy of Jim West/Zuma Press.

The problem started as early as late 2018 when the U.S. put trade sanctions on China. Chinese manufacturers placed large orders for chips before sanctions were implemented. Apple and a few others also placed large orders, causing a lot of demand shortly before the start of the pandemic. 

It’s not just that manufacturing went down, but sales went way up. Sales declined in 2018 and 2019 for semiconductors, but by 2020 sales grew by 6.5% and in the third quarter of 2021, they were 27% higher than they were in 2020 at the same time according to the Semiconductor Industry Association. 

The shortage is the main reason there are such large delays for Apple’s new MacBook.

The shortage will also be felt by consumers as everyone purchases Christmas gifts, as they could see delays and shipping times well into January for orders placed in November.

According to investment firm TS Lombard, semiconductors continue to move ahead of oil as the world’s key commodity input for growth. 

As with everything else as lockdowns were put in place in most countries, manufacturing also took a hit, slowing down production. According to Goldman Sachs, the chip shortage has hit 169 different industries. 

Many chip manufacturers are in a scramble to increase production. Taiwan Semiconductor Manufacturing Co. (TSMC), which accounted for 52.9% share of the global market according to market information advisory firm TrendForce, plans to spend $28 billion to increase capacity, and Intel is said to spend $20 billion on two new production facilities in Arizona. 

Texas Instruments also announced plans in November to build up to four new semiconductor plants in Texas for around $30 billion. 

Despite all these measures, the chip shortage is expected to continue through 2022 and into 2023.

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