Understanding the global semiconductor chip shortage

Here’s what you need to know about this major supply chain problem.

There are chips in nearly everything electric you and I own, from your phone to your computer to your car. There are even chips in items you wouldn’t expect, such as your washing machine, electric toothbrush, and refrigerator. But these tiny parts that power so much of our lives are now in critically short supply.

Nissan said it will be making 500,000 less vehicles due to the chip shortage. General Motors has had to interrupt some of its pickup truck production due to lack of semiconductor chips and has even been parking thousands of vehicles that are completed but still don’t have the needed chips. Apple CEO Tim Cook warned the public back in July that chip shortages would affect sales of its phones and tablets.

Intel chief Pat Gelsinger predicts it will be a year or two before supply can meet demand, and experts say holiday shopping may not offer the variety and options we’re used to.

Here’s how the chip shortage happened—and when it might be over.
The chips, often called semiconductors, sometimes called microchips, function as the brains of our electronics. Their construction involves multiple steps, days, and experts on hand. For example, IBM’s newest chip packs 50 billion transistors into a two nanometer, fingernail-sized space.

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.” And building a factory that can create these chips, which have been consistently shrinking over the years, can cost $10 billion, a price that is prohibitive to most companies. “These are multibillion dollar facilities at the cutting edge of science,” says Lewis.

What is the chip shortage?
As the world shut down because of the COVID-19 pandemic almost 2 years ago, many factories closed with it, making the supplies needed for chip manufacturing unavailable for months. Orders began to pile up as manufacturers struggled to create enough chips to meet the new levels of demand. A backlog began to grow and grow and grow.

Car companies, like Ford, have to predict the amount of chips they will need to produce their cars and order them in advance from one of the chip manufacturers. As of now, it can take at least half of a year for a chip order to come in, says Penfield. The current demand for chips is so great that manufacturers can’t make enough chips to meet it at this time, meaning consumers will soon be seeing higher prices for less goods.

But the issue wasn’t just with manufacturing. As COVID made its way through Asia, ports shut down, sometimes for months. Some 90 percent of the world’s electronics go through China’s Yantian port, and it was recently closed, leaving hundreds of container ships waiting to dock.

Once the ports reopened, bottlenecks emerged because of the buildup of items waiting to be shipped. Many parts of the transportation supply chain don’t have the capacity to handle this buildup, or the labor shortages that have been occurring, plunging the supply chain into further crisis.

What caused the chip shortage?
Bad decisions, bad luck, and then increased demand. Put those three together and you got a recipe for this shortage. The pandemic caused an explosive surge in demand for devices. People were wworking from home, using more tablets, phones and other streaming devices than ever before, and the need skyrocketed beyond what the manufacturers could provide.

Bad decisions by the auto industry also added to the shortage. When COVID started, many companies canceled their orders for chips because they assumed the economy was about to take a lengthy hit​​. Car companies in particular cancelled orders, so chip companies switched to making chips for consumer products, attempting to meet the explosive demand caused by the pandemic. Having retooled their plants to make chips for consumer goods instead of cars, a shortage of car chips ensued.

There aren’t many chip manufacturing plants in the world, and the few that were running during the pandemic were subject to a series of unlucky weather events that delayed the manufacturing process further. Japan’s Renesas plant, which creates almost one-third of the chips used in cars around the world, was severely damaged by a fire, while winter storms in Texas forced some of America’s only chip plants to halt production.

President Biden is making a push to invest in American chip manufacturing, asking for a $50 billion investment in the chip industry. The Senate has passed a bill offering tax credits and other incentives for chip manufacturers.

American chip manufacturer Intel has announced plans to scale up their chip production, while ​​Taiwan Semiconductor Manufacturing and Samsung eye locations for the American factories they plan to build. But while these plans are promising, it will take years before these factories can ramp up their production levels.

What are the effects of the shortage?
Prices are definitely going to be higher for a lot of devices that require a semiconductor. Some products are literally not going to ship, or they’re going to be delayed.

The auto industry is getting hit hard as well, with estimates saying US manufacturers will make at least 1.5 to 5 million fewer cars this year. Ford and General Motors have already limited production. Tesla actually revised its own software to support alternative chips to maintain its production levels.

And while consumer electronics companies like Apple and Samsung began stockpiling chips early on, Apple recently announced that the chip shortage is expected to delay iPhone production and is already impacting sales of iPads and Macs. Xboxes and Playstations are also in short supply.

All indications are that It’s gonna be a tough holiday season and consummers probably won’t see the variety of products we’ve been accustomed to. If you can buy before the holiday season really gets going, you might be in better shape.”

When will the issue be resolved?
Opinions on when the shortage will end vary. The CEO of chipmaker STMicro estimated that the shortage will end by early 2023. The CEO of automaker Stellantis said that the shortage “is going to drag into ’22, easy.” Intel CEO Patrick Gelsinger said the shortage could last two more years.

The expectation is that some of the demand will begin to slow down over the next 6 to 12 months but it will likely be two years before supply catches up with demand.