Why is the Silicon Chips Supply Chain getting disrupted?

“Today, humanity fabricates 1,000 times more transistors annually than the entire world grows grains of wheat and rice combined” 

Covid-19 Pandemic has affected the world in umpteen ways and the chip industry is also affected in many different ways that has led to shortages of parts for all kinds of manufacturers automotive, phone makers, washing machines, airplanes.  In today’s world it is very difficult to find a product without a microchip.

 The supply chain is mostly taken for granted and even for large volumes the lead times for many parts are 3-4 weeks and hence most of the companies plan accordingly. But with the current crisis manufacturer lead times have gone up to 52 weeks meaning if you order a part today it will show up a year later and not many players plan for that long.

What’s really happening?

It is being discussed that the industry had already been struggling with a shortage of parts such as resistors and capacitors for some time. When the pandemic took force, large automotive manufacturers forecasted their demand to go down and cut down on their volumes for production. Meanwhile, with the surge in lockdowns, the demand for electronic equipment like laptops, LCD monitors, gaming consoles and work-from-home support systems escalated. Due to this trend, chip manufacturers quickly moved to building more parts for consumer products that showed demand. Few months into the lockdown, automotive suppliers actually experienced an increase in demand, probably due to folks who could afford it and did not want to travel via public transport.

All major automotive manufacturers were now staring at higher demand than they had planned for and had already lost the window of time to place orders for parts. And then began the hassle to get whatever volumes they could get, and hoard them. Nobody wanted their competitors to be able to sell just because they couldn’t buy chips priced at $1 and less. Hoarding parts and blocking chip manufacturers’ lines led to extreme shortages in the general market. If there was someone keeping tabs on the hoarding, and instead tried to ration it, the problem would not have become this bad.

Another problem is with raw material. The wafer on which chip circuitry is printed on, is derived from Sand (SiO2) and with Covid Vaccines using vials that are made of Silica (50 to 80%), also leading to issues with the sourcing of raw materials.

The Chip Manufacturing Industry

The chip manufacturing industry is a secretive industry and is controlled by a handful, mostly located in the island country of Taiwan (the thorn in the relations between China and the US). Taiwan Semiconductor Manufacturing Corporation (TSMC) is one such company that manufactures for several equipment manufacturers like Apple, Qualcomm, Nvidia, Tesla  and according to a report, 84% of the high-end chips market (e.g. A12 processors on the latest Apple iPhone), are manufactured by them.  There are other companies like Intel and Samsung who have manufacturing facilities in the US, South Korea and Europe, but they mostly cater to the Server and PC markets. Other players like Texas Instruments, STMicroelectronics have their own facilities, but with such high demand, they have also been swamped and unable to keep up.

While it may be true that we are able to produce more transistors at a cheaper price than rice and wheat combined, the recipe remains a trade secret and is owned by a few companies from select countries. The domination of the US and Taiwan has been evident for years and China is trying to shake that up. Semiconductor Manufacturing International Corporation (SMIC) is China’s answer to Taiwan but how this pans out in the future is something we need to see. Unfortunately, India does not have a single large chip manufacturing facility and “Atmanirbhar” will remain a dream until we have one. Governments all over, such as Taiwan, China and Ireland have funded and provided incentives to set the ball rolling. The Indian Government will have to create those incentives and also invest in infrastructure.

When this will go normal

This chip crunch is estimated to last until 2022 and may lead to an increase in price for products from mobile phones to laptops to anything that uses microchips. The shortage is estimated to go worse before it settles down. Any new capacity building will need years to reach production capacities, so until then all companies will need to devise ways to live with the crunch