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Why the chip shortage drags on and on… and on

Why the chip shortage drags on and on… and on

 November 14, 2021 at 7:37 am   |     Author:   |     Technology  

Why the chip shortage drags on and on... and on

Bloomberg | Getty Images

The semiconductor industry lives at the cutting edge of technological progress. So why can’t it churn out enough chips to keep the world moving?

Nearly two years into pandemic-caused disruptions, a severe shortage of computer chips—the components at the heart of smartphones, laptops, and innumerable other products—continues to affect manufacturers across the global economy.

Automakers have been forced to halt production in recent months as sales decline because they can’t make enough cars. The shortage has affected industries from game consoles and networking gear to medical devices. In October, Apple blamed chip scarcity for crimping its financial results, and Intel warned that the drought will likely stretch to 2023.

In short, the semiconductor supply chain has become stretched in new ways that are deeply rooted and difficult to resolve. Demand is ballooning faster than chipmakers can respond, especially for basic-yet-widespread components that are subject to the kind of big variations in demand that make investments risky.

“It is utterly amazing that it’s taken so long for the supply chain to rebound after the global economy came to a halt during Covid,” says Brian Matas, vice president of market research at IC Insights, an analyst firm that tracks the semiconductor industry.

For one thing, the sheer scale of demand has been surprising. In 2020, as Covid began upending business as usual, the chip industry was already expecting an upswing. Worldwide chip sales fell 12 percent in 2019, according to the Semiconductor Industry Association. But in December 2019, the group predicted that global sales would grow 5.9 percent in 2020 and 6.3 percent in 2021.

In fact, the latest figures show that sales grew 29.7 percent between August 2020 and August 2021. Demand is being driven by technologies like cloud computing and 5G, along with growing use of chips in all manner of products, from cars to home appliances.

At the same time, US-imposed sanctions on Chinese companies like Huawei, a leading manufacturer of smartphones and networking gear, prompted some Chinese firms to begin hoarding as much supply as possible.

The surge in demand for high-tech products triggered by working from home, lockdown ennui, and a shift to ecommerce has only continued, taking many by surprise, says David Yoffie, a professor at Harvard Business School who previously served on the board of Intel.

Chipmakers didn’t appreciate the extent of the sustained demand until about a year ago, Yoffie says, but they can’t turn on a dime. New chip-making factories cost billions of dollars and take years to build and outfit. “It takes about two years to build a new factory,” Yoffie notes. “And factories have gotten a lot bigger, a lot more expensive, and a lot more complicated too.”

This week, Sony and Taiwan Semiconductor Manufacturing Company, the world’s largest contract maker of chips, said they would invest $7 billion to build a fab capable of producing older components, but it won’t start making chips until the end of 2024. Intel is also investing in several cutting-edge new fabs, but those won’t come online either until 2024.

Yoffie notes that only one company, ASML of the Netherlands, makes the extreme ultraviolet lithography machines needed for cutting-edge chip-making, and ASML can’t produce the machines quickly enough to satisfy demand.

Another issue is that not all chips are created equal.

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