Running on empty

From the June 2022 print edition

Microchips are in nearly everything that we use today.

Whether that be our smartphones, smart watches, computers, washing machines, trimmers, toys, televisions and automobiles.[1] However, as industries are phasing out of covid-19 restrictions, they are facing an unprecedented crises of material shortage. One of such industries is automobile where global automakers are facing severe shortage of semi-conductors.[2]

During the earlier months of the covid-19 pandemic, the automobile sales plunged down as low as 80 per cent. [3]

Manufacturing chips is a complex process and it takes more than three months to make a chip. Since production cannot be pushed on a short notice, it will take manufacturers a long time to catch up and meet the mounting demand.[4] It has been projected that the growth of global semiconductor market is expected to rise from $425.96 billion in the year 2020 to $803 billion in 2028 at a compound annual growth rate (CAGR) of 8.3 per cent.[5]

Semiconductors, commonly known as integrated circuits (ICs) or microchips are made of materials such as silicon. Semiconductor are produced in a variety of sizes. Hosting numerous transistors within them, they are considered the brains of modern electronics. Their construction involves multiple steps, experts input, and longer production time. IBM’s latest chip packs around 50 billion transistors into a two nanometer, fingernail-sized space.[6]

Semiconductor is the lifeline of many industries including automobile. An average modern automobile uses more than 1400 semiconductors which support safety features, electrical system, powertrain, and communication.[7] These microchips play essential role in our modern-day society. Long before the pandemic begun, demand levels of these microchips had started to rise dramatically.

Today Taiwan and Korea control what’s known as the ‘lion’s share’ of microchip production. Even though microchips are an American invention, the volume of the U.S manufacturers producing microchips has steadily fallen. In the year 1990, 37 percent of microchips were manufactured in the US, nevertheless by the year 2020 that number dropped sharply to merely 12 percent. For decades, the tech industry has been driven by a prediction made by Intel cofounder Gordon Moore in 1965; it held that the number of transistors incorporated in a chip will approximately double every 24 months. While, its demand increasing steadily, the availability of these microchips is consistently shrinking over the years. One of the possible reasons to build-up new microchip factories is its high cost on investment. According to an estimate, it can cost around $10 billion to build a chip manufacturing factory, a price that is prohibitive to most businesses.[8] 

The chip shortage has resulted in mass employee layoffs and has affected the global economy. It is predicted that the chip shortage is expected to cost the automotive sector a loss of around $200 billion.[9]

All major automobile producers are experiencing unprecedented demand supply mismatch, resulting downtime and assembly lines closures. Jaguar Land Rover was forced to shut down two of its main car manufacturing factories temporarily because of this massive chip shortage. GM, Cadillac, Ford and Stellantis have either reduced their production capacity or suspended their assembly line operations in North America. G.M (General Motors) has had to halt parts of its pickup truck operations. Nissan announced in May 2021 that due to chip shortages it will be making 500,000 less vehicles.[10] [11] [12]

According to Mr. Hogan the vice president of Global Foundries estimates that “it could take up to 20-25 weeks from the time the chip order has placed and is reached to cars using the supply chain.”[13] Chip shortage is predicted to continue throughout 2022 as the sourcing of the raw materials continue to be affected mainly due to the surge of new Covid-19 variants. Nonetheless, experts believe that even when regular production is restored, organizations won’t be able to offer wide range of variety to customers which they were familiar with.[14] [15]

Reasons for the shortage
Since 2015, there has been a high volatility in the semiconductor market primarily due to the geopolitical tensions, longer leadtime, natural calamities, carbon emission curbs, and changes in customer purchase.[16] [17]

Microchip manufacturing plants in the world are limited in number as they are very expensive to operate. A few that were operating throughout the pandemic were faced with a series of unfortunate weather events that halted the manufacturing process further. Japan’s Renesas plant, which produces almost one-third of the world’s microchips was severely damaged by a fire,[18] while winter storms in Texas, USA forced microchip plants to stop production.[19]

Whereas, in September 2020, the US Department of Commerce had imposed restrictions on Chinese chip manufacturers. These restrictions forced companies to turn to other chip manufacturers located in countries like Taiwan, but these companies were already producing on their maximum capacity.[20] Taiwan, one of the largest manufacturer of semiconductors in the world was hit hard by the dreadful drought in 2015 and 2021. Which has caused reduced supplies of water to the chipmakers. As a result, chip makers including one of the largest in the world Taiwan Semiconductor Manufacturing Company (TSCM) have taken initiatives in becoming water efficient and adopting processed-water recycling techniques. However, increasing demand of semiconductors has dwarfed such initiatives.[21]

On the other hand, when due to covid-19 pandemic car sales went down, automobile manufacturers cancelled their purchase orders for semiconductors due to their lean approach which resulted in little to no-inventory in hand. Now, when the car sales has sharply increased as pandemic has started to fade, automobile manufacturers are running short of semiconductors. The lack of safety stock of these chips and the nature of short-term contracts with chip-makers have proved to be catastrophic as these automakers had failed to hedge against the uncertainty.

In addition to the above stated reasons there are some other significant reasons behind the shortage of semiconductors. For instance, the increasing use of technology such as IOT to improve logistics operations, the growing demand of gaming devices during the COVID-related shut downs, a growing use of cloud computing and the electronic devices facilitating online education and work-related virtual meetings during the pandemic, an upsurge in the adoption of 5G communication technology in both developed and developing markets has also caused a shortage of semiconductors.[22] It is estimated that 5G smartphones will account for 71 per cent of smartphones by 2024. This will also dictate generating a demand for more complex chips for advanced mobile applications in a shorter span of time. Moreover, the growing interest of masses in crypto currencies and the resulting need for crypto mining devices have also played their part in creating the shortage of semiconductors.[23]

Finally, since majority of the chip makers are located in Taiwan, and China which were seriously affected by the first wave of the pandemic, the entire production was halted in the early months of 2020. The pandemic also hit the upstream supply chain as well, limiting the sourcing of raw materials and availability of workers for factories. Workers for such factories need specialized training for handling the toxic chemicals used in the chip-making process. Intel is even running a “help wanted” advertisement campaign on TV and radio programs aimed at students who are still in college to work part-time.[24]

Many automakers are now operating in crisis mode, and few expect a rapid resolution. Experts believe that the crisis will extend to 2023 creating loss of billions of dollars for the industry. Automobile manufacturers and chipmakers alike will need to work together to tackle the imbalance in demand.

Toyota, a pioneer of Just-in-Time (JIT) production management approach has announced that it will reconsider its JIT management principle to avoid shortages and has recently introduced a Business Continuity Plan which mandates the suppliers to stockpile 2 to 6 months stocks of microchips.[25] Whereas, Tesla which has roots in silicon industry unlike traditional automotive industry, when faced with such shortages swiftly modified the software necessary to integrate alternative chips into its vehicles.[26]

TSMC has announced to raise its production of semiconductors for automobile industry by 60 per cent. Intel and Samsung have also developed plans to improve production and meeting the requirements of the automobile industry.[27]

The chip shortage has forced governments to take actions. The US President Joe Biden recently met the CEOs of AT&T, Intel, Dell, Ford, General Motors, and other industry officials to discuss the issue. He stressed the need for the government to invest more in the industry and stay ahead of the competition. As a result, Biden administration’s $2 trillion infrastructure investment package includes $50 billion for the semiconductor industry. Similarly, South Korean government has announced a massive $451 billion investment to help companies boost the production of semiconductors. Several chip manufacturing companies have established new facilities to increase their capacities.[28] Completion of these sites will have major impact on containing the chip shortage issue. At a conference in September, AMD CEO Lisa Su, said that new manufacturing plants are going to considerably reduce such supply chain issues by the second half of 2022. However, this is very optimistic as Matt Murphy, CEO of Marvell Technology, told in October that these factory expansions won’t be effective to produce semiconductors until 2024.[29]

To avoid future semiconductor shortage, auto manufacturers can focus more on leveraging standard chip designs which could offer them an advantage of getting a larger and more diverse supply base. In

Dr. Naveed Ahmed Khan is a professor (adjunct) at the School of Management, George Brown College, in Toronto.

addition, collaborative forecasting, better relationship with chip suppliers, and the improved risk analysis could ensure continuous supply of semiconductors. Such initiatives can also lower the risk of counterfeit parts and curtail the higher prices of chips for automobile sector. However, diversifying supply-base and opening new production facilities does not seem to be a short-term solution as changing the design requirements, adapting with the specifications of new suppliers, and licensing process of the patented chips would take significant amount of time.[30]

[1] Leslie, M. (2022). Pandemic scrambles the Semiconductor Supply Chain. Engineering, 9, 10–12.

[2] Fortune Business Insights (2021). Semiconductor Market Size, Share, & COVID-19 Impact Analysis…….Forecast, 2021-2028.

[3] Burkacky, O., Lingemann, S., & Pogkas, K. (2021). Coping with the auto-semiconductor shortage: Strategies for success.

[4] King, I., Leung, A., & Pogkas, D. (2021). The Chip Shortage Keeps Getting Worse. Why Can’t We Just Make More?

[5] Cole, C. (2022, February 11). Why is there still a chip shortage for cars? Road Show Why is there still a chip shortage for cars?

[6] Feder, S. (2021, OCT 12). Understanding the global chip shortage, a big crisis involving tiny components. Popular Science:

[7] Buchanan, S. (2022, January 04). How many semiconductor chips are there in a car? Economist Writing Every Day.

[8] Feder, S. (2021, OCT 12). Understanding the global chip shortage, a big crisis involving tiny components. Popular Science:

[9] Ramachandran, V. (2022, January 7). Way ahead for global automotive industry amid semiconductor chip shortage. KPMG.

[10] BBC (2021, April 22). Jaguar Land Rover to suspend output due to chip shortage.

[11] Wayland, M. (2021, April 08). GM and Ford cutting production at several North American plants due to chip shortage.

[12] Wilhelm, T. (2021). Windsor Assembly Plant to cut second shift in 2022.

[13] Ewing, J., & Clark, D. (2021, January 13). Lack of tiny parts disrupts auto factories worldwide. The New York Times.

[14] Irwin, J. (2022, March 14). Microchip-related cuts surge. Automotive News, 96(7029), 0033.

[15] O’Donnell, G. (2021, April 22). The global chip shortage won’t ease soon. Forrester

[16] Barrett, E. (2021). Supply chain delays are bad—China’s rolling power outages will make them worse.

[17] McKellop, M. (2021, December 02). Predictions for the 2022 Global Semiconductor Sector.

[18] Yamamitsu, E. (2021). Renesas says normal production at fire-hit chip plant to take 100-120 days.

[19] Shih, W. (2021). Severe Winter Weather in Texas Will Impact Many Supply Chains Beyond Chips.

[20] Swanson, A. & Zhong, R. (2021). U.S. Places Restrictions on China’s Leading Chip Maker.

[21] Barbiroglio, E. (2021, June 01). No water no microchips: What is happening in Taiwan? Forbes.

[22] Sourcengine Team. (2021, October 26). Microchip Lead Times Reach 22 Weeks Following Chinese Power Cutbacks.

[23] Alam, S.F., Chu, T., Björnsjö, A., & Chopra, S. (2021). Semiconductor and the 5G opportunity, Accenture.

[24] Frith, L. (2021). Semiconductor Labor Shortage Casts Shadow Over Supply Chain.

[25] Trivedi, A. (2021, February 17). Toyota broke its just-in-time rule just in time for the chip shortage.

[26] Elliot, R. (2021, December 31). How Elon Musk’s software focus helped Tesla navigate chip shortage. Fox Business.

[27] Sourcengine Team. (2021, September 15). Why chipmakers cannot quickly fix the global semiconductor shortage. Supply Chain 24/7.

[28] Kondepudi, R. (2021). The Semiconductor Shortage: What caused the supply crunch and how long will it last?

[29] Mak, A., (2021, November 04). Why the Chip Shortage Hasn’t Been Fixed Yet.

[30] McKellop, M. (2021, December 02). Predictions for the 2022 Global Semiconductor Sector.