People in business suits in a big building

People in business suits in a big building

The semiconductor chip shortage is real and not simply scarcity marketing. Find out why there is a chip shortage, the problems it is causing, and how businesses can cope with the situation.

Reports about semiconductor chips being in short supply are common. Although marketers are fond of saying that something is scarce in order to get people to buy products and services, this time the shortage is real. Here’s look at why there is a chip shortage, the problems it is causing, and how businesses can cope with the situation.

Reasons for the Chip Shortage

The Coronavirus Disease 2019 (COVID-19) pandemic is often blamed for the semiconductor chip shortage. However, it is not the only cause. There are other reasons why supply has not kept pace with demand recently. The pandemic was the match that made the existing powder keg of supply and demand issues explode into a full-blown shortage.

Here are the main reasons why the demand for chips is high while the supply is low:

High demand. For the past two decades, the demand for semiconductor chips has been steadily increasing. Worldwide sales grew from $204.4 billion in 2000 to $440.4 billion in 2020 — a compound annual growth rate of 3.91% per year. One reason for the steady increase is that chips are being incorporated into more types of products. Besides being an integral part of traditional electronic computing devices such as desktop computers, tablets, and smartphones, chips are now being integrated into goods that historically did not have them, including automobiles, appliances, televisions, and even toilets and toothbrushes. Plus, new types of electronic computing devices are being continually being developed for emerging markets such as Internet of Things (IoT) and artificial intelligence (AI).

In addition to the expected increase in demand for chips, there has also been an unexpected surge in demand due to the COVID-19 pandemic. When governments started issuing stay-at-home orders to slow the spread of the coronavirus, desktop computers, laptops, webcams, and other electronic devices started flying off the shelves. Businesses and consumers alike were purchasing them so that people could work, attend classes, communicate, and collaborate remotely. The empty shelves have, in turn, prompted electronic device manufacturers to order more chips than anticipated.

Low supply. The supply of semiconductor chips has not kept up with the high demand for a variety of reasons. The most notable ones include:

  • Recent disasters have been impacting the production of semiconductor chips. For example, a misbehaving piece of equipment caused a fire in a building at Renesas Electronics’ Naka Factory in March 2021. The building’s chip operations were completely shut down for a month. And once it reopened, it had only limited production capacity for another two months. Natural disasters have also impacted chip production. When winter storm Uri hit Texas in mid-February 2021, three chipmakers — Samsung Foundry, Infineon Technologies, and NXP Semiconductors — had to shut down their operations due to rolling power outages. Even though the power was restored by the beginning of March, it took more than a month for them to return to full capacity due to the complexities of chipmaking.
  • The US-China trade war. The trade war between the United States and China began in July 2018 and continues to this day. Primarily focused on technology, it has resulted in both countries levying tariffs on imported products and issuing company sanctions. As part of the trade war, the United States imposed restrictions on several Chinese tech companies. In anticipation, some of those companies stockpiled semiconductor chips and chipmaking equipment before the restrictions took effect. This stockpiling has drained the supply of chips and chipmaking equipment.
  • Difficulty in ramping up production. Fabricating chips is a complex, time-consuming process. It takes about 12 weeks to fabricate standard chips and up to 20 weeks to produce highly advanced ones — and that does not include the additional 6 weeks needed for back-end assembly, testing, and packaging. Fabricating chips is also resource-intensive. Besides requiring large amounts of power and ultrapure water (up to 8 million gallons per day), it must take place in specially designed cleanrooms that are up to 10,000 times cleaner than operating rooms. As a result, there is no quick and easy way to ramp up the production of chips.
  • The COVID-19 pandemic. In the United States, employees involved in fabricating chips are considered essential workers so they have worked throughout the pandemic, even if their state governments issued stay-at-home orders. Nevertheless, chip production has diminished due to coronavirus outbreaks at the fabrication facilities. Outbreaks at suppliers’ facilities are also resulting in reduced production since the chipmakers must put their operations on hold until the needed equipment and materials arrive.

Problems Caused by the Chip Shortage

Virtually all companies will be affected by the semiconductor chip shortage. Manufacturers of chip-infused products are already feeling the effects. For example, AppleMicrosoft, and other electronics manufacturers are having problems getting the chips they need to build their devices. The same holds true for automakers and appliance manufacturers.

When manufacturers do not have the necessary semiconductor chips, they have to delay or slash production. For example, Toyota will be cutting production 40% percent in September 2021 because of the chip shortage. Manufacturers also tend to raise prices on the products that they do produce.

This new reality affects other companies big and small, no matter their industry or location. Businesses will likely have to spend more time searching for chip-infused products, as their first or second choice might not be available. And when they do find a suitable product that is in stock, they will likely have to pay more for it than in the past.

Considering that companies typically use many different types of chip-infused products — laptops, printers, routers, air conditioners, refrigerators, coffeemakers, and LED light bulbs, just to name a few — the impact of the chip shortage on their budgets could be significant, especially for small businesses. In addition, if they want a specific brand and model of a product, they might have to wait a long time for it to become available.

What Businesses Can Do to Cope

Industry experts have not reached a consensus about how long the semiconductor chip shortage will last. For example, Gartner expects the shortage to end by the second quarter of 2022. Forrester is more pessimistic, predicting it will last into 2023.

While these predictions differ, they both indicate that the shortage will not end for quite a while. Thus, companies might need to change the way they approach purchasing chip-infused goods. Here are some strategies you might consider trying when shopping for chip-infused products for your business:

  • Postpone any “nice to have” purchases. Before shopping for a chip-infused product, you might want to take a step back to determine whether it is falls into the “Need” or “Nice to have” category. Consider delaying any “nice to have” purchases until after the chip shortage has ended.
  • Maintain your existing chip-infused products. It is a good idea to make sure that your existing products are being well maintained. That way, they will last longer.
  • Try a different seller. There will be times when you need to purchase a new or replacement product for your business. If the product you want is not available or is too expensive at your preferred brick-and-mortar or online retailer, try a different seller. Another retailer might have what you want in stock at a reasonable price.
  • Check out other models or configurations. If the chip-infused product you were looking for is out of stock, check out other models or configurations offered by the manufacturer. It might not be exactly what you were looking for, but at least it is in stock.
  • Research different manufacturers’ products. If the chip-infused product you want to buy is not available or is too expensive, research similar products offered by different manufacturers. You might find that the quality of their goods is comparable to the product you initially wanted.
  • Think outside the box. When shopping for chip-infused products, don’t be afraid to think outside the box. For example, buying a refurbished product or using a cloud service instead might be a viable alternative.
  • Order chip-infused products well in advance. If you need to order a product, be sure to order it well in advance of when it will be needed. A chip shortfall at the manufacturing facility might significantly delay its delivery.
  • Adjust your 2022 budget. You will likely be paying more for chip-infused products, so it is a good idea to make sure your company’s 2022 budget reflects those increases. This is especially important if your business needs to purchase big-ticket items.

You Can’t End Chip Shortage But You Can Minimize Its Impact

The semiconductor chip shortage is real. Although you can’t end the shortage, you can minimize its impact on your business by planning ahead and being sensible and flexible when purchasing chip-infused products. It also is important to keep your existing chip-infused products maintained to reduce the chance that they will need to be replaced. We can help keep your company’s computers, printers, routers, and other IT electronics well maintained and operating smoothly.

Business Photographers flickr photo by Rui de Matos shared under a Creative Commons (BY-SA) license