What is Causing the Semiconductor Shortage and When Will It End?

The chip shortage is starting to affect everything from smartphones to cars. It started in 2020, and there is no sign of it actually ending any time soon.

So, what is causing the shortage, and when will it actually begin to resolve?

Causes of the Semiconductor Chip Shortage

The causes of the semiconductor shortage are both simple and complex. The shortage started in 2020 when the COVID-19 pandemic forced many production facilities, especially in China, to shutter for extended periods of time. Chip manufacturing came to a complete standstill. This came at the same time as increases in demand, largely from machine learning applications such as primitive self-driving vehicles, data management, etc. Extended lockdowns also increased the demand for new devices such as gaming consoles and more powerful PCs. In fact, the demand for PCs increased by 13% globally.

China’s continuing COVID zero policy interrupted chip supplies further. So did the economic conflict between the US and China. In late 2020, the U.S. Department of Commerce put restrictions on Semiconductor Manufacturing International Corporation, China’s largest chip manufacturer. Then, on top of that, there was a cryptocurrency boom, including the sudden popularity of NFTs. Cryptocurrency mining machines require incredible amounts of computing power, although thankfully that has eased off.

Production has also dropped for two other reasons. First of all, drought in Taiwan has caused a shortage of pure water that is used to clean silicon. And the war in Ukraine has cost us about 50% of semiconductor-grade neon, used in the lasers that etch circuits onto chips.

In other words, the cause is a perfect storm of demand, plague, weather, and war. (Which may make the fourth horseman demand, not death).

What Is Likely To Happen Next?

China has dropped its COVID zero policy abruptly, resulting in a huge spike of illness in the country. This has caused more shutdowns of microchip plants in the country. While this situation will slowly resolve itself as the population builds immunity, based on timelines in the rest of the world it may well be another year before COVID ceases to cause dramatic disruptions of supply chains.

The war in Ukraine also shows no sign of coming to a quick resolution.

There is thus likely to be pressure on the supply side of the market at least through the end of 2023. A lot depends on whether alternative sources of neon can be brought online quickly. Companies may be hesitant to do so in the hope that the conflict will be resolved in the near future. The Financial Times predicts that the auto industry will continue to experience shortages for at least this year due to the supply issues and the climate crisis, which is increasing demand for electric vehicles that use more chips.

However, the drought situation has been resolved and Taiwan Semiconductor Manufacturing Co Ltd, the world’s largest contract chipmaker, is now making record profits as they seize the opportunity created by the shortage.

Another thing that could help is a predicted drop in demand of about 20% from the peak. This is a normalization of demand. With COVID lockdowns over in much of the world, PC and console sales have slowed. Unfortunately, this prediction was made prior to the lifting of COVID zero in China. COVID zero slowed consumer demand in China itself. Lifting the restrictions is thus likely to increase it. This means this prediction may not be accurate. It also is based primarily on memory chips, which have not shown as much of a shortage. We doubt that demand will drop that much, and the reduced demand for PCs and smartphones may be overwhelmed by an increased demand for cars as people start to travel again.

That said, the economy may also cause a drop in demand. The global economy is predicted to grow by only 1.7% in 2023 and 2.7% in 2024. Consumer confidence is low and many people may be putting off purchases of electronics they might otherwise have made. This may also reduce investment.

While an end to the shortage would be very good news, it would not be good news for manufacturers if it was caused primarily by a drop in demand for consumer electronics, and unfortunately, the drop in demand seems inevitable.

What Are the Opportunities Here?

There is a major opportunity here for any company that can diversify their supply chain. There needs to be a push for increasing sources of neon and for producing it other than as a side effect of steel production (with less steel being used in automobiles, the demand for steel is dropping), and for developing alternative chip manufacturing technologies.

Investment in new production facilities located outside China is also a potential opportunity, although a drop in demand may make that a poor choice. The key here is to understand your supply chains and ensure that you do not become dependent on any one facility which could, at any time, be impacted. The perfect storm that has hit the chip industry is a wake-up call that we need to stabilize and diversify our supply lines in an ever more interconnected world.