Amid a global chip shortage, new players are seeking a slice of the action

22 Feb 20211.5k Views

Image: © singkham/Stock.adobe.com

The crunch of a worldwide chip shortage has lit a fire under regions hoping to attract big investment for new foundries.

We are in the midst of a global chip shortage. No, this isn’t the return of the Brexit-driven shortage of Scottish potatoes that threatened our chippers. We are running low on computer chips. The teeny tiny bit of tech that powers your electronics.

This is because chips go with everything. Computers, games consoles, smartphones, smart TVs, smart watches, smart toys, all those gadgets powering your smart home, and cars. Cars, especially, are at a loss without a steady supply of computer chips. The modern vehicle is surprisingly dependent on computing power to hit the road. This is true for the gas-guzzling types as much as for electric and hybrid cars. Cars use computer chips for everything from management of engines for better fuel economy to driver-assistance features such as emergency braking.

And it’s the carmakers that are really hungry for chips right now. The consumer electronics and smartphone industries buy more advanced, higher-margin chips. So, in a chip shortage, they’re the ones prioritised for manufacture and sale. Meanwhile Volkswagen, Ford, Subaru, Toyota, Nissan and General Motors have all cut output while the chips are down.

But it can’t be said these manufacturers have been caught off guard. PC-makers started warning of a tight supply of computer chips in early 2020. Which is why, while some people were stockpiling toilet roll at the start of the pandemic, companies were stockpiling semiconductors.

US sanctions on Huawei exasperated the issue. Under threat of being cut off from its primary semiconductor suppliers, Huawei started hoarding components. This was copied by other Chinese companies to the point that China’s imports of chips reached almost $380bn in 2020, representing almost one-fifth of the country’s total annual imports.

Covid-19 and the chip shortage

Like with many problems of the past year, Covid is a culprit in the chip shortage. The early days of the pandemic saw factory closures in China, typically the epicentre of production for consumer electronics. With these factories shuttered, demand for chips dropped. And as Covid-19 restrictions expanded around the globe, chip sales continued to stutter.

The unprecedented nature of the pandemic’s impact on manufacturing meant there was no script to follow in responding. While some manufacturers began hoarding components, others pulled back on orders just as we all began working and learning from home.

And that’s when the crunch came. The unexpected boom of remote working and learning was a bust for manufacturers who let their chip orders go stale. Demand for laptops, webcams, keyboards, monitors, smart TVs, game consoles and tablet computers went through the roof. What chips were available were being greedily gobbled up to meet this surging market demand.

There was also a mistake made in assessing the pandemic’s impact on the smartphone industry. Forecasters were right about a drop in demand in the early days, but smartphone sales had recovered by the third quarter of 2020. Into the fourth, demand was just 2pc shy of pre-pandemic levels. This was fuelled by the release of Apple’s 5G iPhones, which shipped a record-smashing 90.1m units.

Absolutely fabless

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And so, after a dramatic drop-off, chip demand returned to sustained heights. Heights that were already flagged as unmanageable even before the pandemic.

Now, those who can’t get their hands on some precious chips are struggling. The shortage is expected to wipe out $61bn in sales for carmakers alone. And this blight could spread to consumer electronics such as smartphones and games consoles, which could see shortages or even price hikes.

Even Intel, one of the world’s largest chip producers, has been feeling the pinch of its supply bottlenecks. Intel famously designs and manufactures its own chips – we even have some of its fabrication plants, or fabs, here in Ireland. But the company’s recent struggle to reach demand has prompted it to consider outsourcing.

Companies that design microchips but outsource their production are ‘fabless’. What’s not fabulous is this ecosystem means that businesses all over the world are heavily reliant on a few key businesses to deliver their chips. In particular, east Asia has a significant share of the market through Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics in Taiwan, and Samsung in South Korea.

The flaws in this concentration of computing power production are now apparent, and many countries and regions are keen to enter the chip race, or accelerate their performance.

In the coming years, hundreds of billions is expected to be spent by governments and corporations to take the lead on chip production. We can expect to see generous incentives launched to attract advanced manufacturing facilities to new locations.

In the US, the Biden administration has supported a $12bn plant for TSMC in Arizona with generous tax subsidies. The same warm welcome will likely be rolled out for Samsung, which is reportedly considering setting up a fab in Austin, Texas, for more than $17bn.

The European Union is reportedly in talks with both these companies to support the building of an advanced semiconductor factory in Europe. This would lessen the region’s reliance on foundries in the US and Asia for this essential tech component. As Ireland has seen with Intel’s fabs, this will mean job creation at the forefront of the technology industry. And with more chips being made, the possibilities for tech’s progress will be vastly multiplied.

A version of this article was produced as a radio essay for The Business on RTÉ Radio 1. You can listen back here.

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Elaine Burke is the editor of Silicon Republic

editorial@siliconrepublic.com