The world is already dealing with chip shortages, which will extend throughout 2022 until locally made chips take the center stage in filling the supply gap. Despite this, there will be shortage of several types of chips with even some component lead times pushing into 2023, reported Deloitte Global. This means the shortage will last 24 months before it recedes, similar to the duration of the 2008-2009 chip shortage.
The report also highlights the good part. It says that the shortage will be less severe than in fall 2020 or most of 2021 and will not impact all chips. The wait time in mid-2020 stood between 20-52 weeks for multiple kinds of semiconductors, which caused manufacturing delays or shutdowns leading to revenue losses in hundreds of billions of dollars. This lead time will be close to 10-20 weeks by the end of 2022 and the industry will be in balance by early 2023, reported Deloitte Global.
Leading to Crisis – High Demand
By now we all are aware of what caused the semiconductor shortage – higher demand and lower supply. The pandemic induced sudden lockdown led to the surge in demand-driven largely by digital transformation. A large number of semiconductors was diverted to consumer devices, mechanical products in various industries along the vertical sector going digital. As per the report:
- Chip demand for both devices and data centers shot up in 2020 and 2021. The pandemic caused PC sales to rise by more than 50% year over year in early 2021, while cloud computing data center chip purchases went up by 30%. Although growth in both areas slowed a little in 2021’s later months, demand in 2022 is predicted to stay well above long-term trends.
- The automotive industry’s use of chips is growing fast and will probably keep growing for the foreseeable future. The average car in 2010 contained US$300 worth of microchips. As cars become increasingly digital, that figure will likely rise to more than US$500 in 2022, totaling more than US$60 billion for the year. Although there were some signs that the auto industry’s chip shortage was easing by the summer of 2021, lead times were still longer than usual and automakers were still cutting production.
- The health care industry’s use of chips will likely grow. Regulators are approving connected home health care devices such as wearables and smart patches whose use may span hundreds of millions of units, especially given the rise in virtual visits.
- The demand for chips specialized for artificial intelligence—specifically, for machine learning training and inference—is predicted to grow at over 50% annually across all computing categories for the next few years, with most of these chips requiring the latest and greatest manufacturing techniques.
While almost every industry was impacted by this shortage, the badly hit was the automotive industry. However, even supply chain cares about the chip shortages just like every industry. The report mentions most supply chains are designed to be consolidated and cost-effective, but they can be brittle as a result. Limited visibility and lack of real-time communication between supplier tiers can lead to a bullwhip effect where small shifts in demand are amplified, resulting in high cumulative demand volatility.
This chip shortage is hitting every sector badly leaving chipmakers scrambling to catch up. The world’s three largest semiconductor manufacturers announced over $60 billion cumulative annual capital expenditures for 2021. These companies will likely spend even more in 2022. Some of these investments will go towards increasing capacity at their existing fabs and even construction of new facilities. Intel’s two new fabs in Arizona for over $20 billion is one such instance.
Deloitte’s report also mentioned that the venture capital investment in startup chip companies will have more than tripled in 2021 and 2022 compared to the annual average of the previous 15 years. Even though these startups are mostly focused on designing them, these companies will want to make chips to use up still-tight capacity.
The report also mentions that to guard against future shortages, governments are pushing to increase local supply. While 81% of semiconductor contract manufacturing was based in Taiwan or South Korea as of 2020, countries like US, EU and China have all committed to growing their country or region’s semi fabricating capacity, a process called localization, which will not just avoid shortages but also enhance national security. The proposed $52 billion CHIPS for America Act was a part of the National Defense Authorization.
However, localization efforts will take time because increasing chip manufacturing capacity is a slow process, especially cutting-edge chips that are called the most complex devices ever made requiring billions of dollars, expertise and years of time to getting the new plant up and running.
