The peak of the epidemic has passed. Why has the global "chip shortage" not yet recovered?

From the outbreak of the COVID-19 pandemic to the present, chip shortages have plagued the electronics supply chain. Nearly two years after the pandemic triggered industry turmoil, chips, the heart of many technology products, are still in serious shortage; manufacturers of game consoles, network equipment, medical devices, automobiles and other industries are still suffering from chip shortages. People initially thought that this problem would solve itself - either manufacturers would step up efforts to meet demand, or demand would naturally cool down, but now the "chip shortage" problem is still very serious.

The chip problem has not only not been alleviated, but has become increasingly difficult to control. Even when city lockdowns and home quarantines have become a thing of the past, chip shortages are still a major problem.

Some automakers have been forced to stop production due to a sharp drop in sales due to the inability to produce enough cars. On November 17, Volkswagen suspended production of electric vehicles in Germany due to supply chain issues. The Associated Press reported in September that due to the chip shortage, many GM and Ford North American assembly plants were temporarily shut down; Tesla CEO Elon Musk once reminded employees in an internal email that Tesla's delivery volume depends on the global chip shortage, which is still severe.

In October this year, Apple attributed its poor financial performance to chip shortages, and there were reports that the iPhone 13 would reduce production by 10 million units due to chip shortages; Intel also warned that the supply and demand situation may continue until 2023.

The gaming hardware industry is also not doing well. Nintendo also announced this month that it had to lower its sales forecast due to factors such as chip shortages. Nintendo expects total sales of 24 million units in the current fiscal year, which is about 6% lower than the previously set sales target of 25.5 million units.

In short, the semiconductor supply chain has stretched in new ways that are entrenched and difficult to resolve. The growth rate of demand exceeds the capabilities of chip companies, especially for widely used basic components, which will bring several major investment risks due to huge demand fluctuations.

Brian Matas, vice president of market research at semiconductor industry analysis firm IC Insights, said: "The global economy has been at a standstill for so long because of the epidemic, and the supply chain has not yet recovered."

The chip industry is clearly at the forefront of technological advancement, so why is there always a shortage? Even a PS5 is sold out in seconds.

The reason why the chip shortage continues is mainly because supply cannot meet demand - chip demand is still surging, but building new factories is not always a one-night job. In addition, the cyclical changes of historical ups and downs have also discouraged some investors.

Demand is rising fast, but building new factories is not that fast　　

In 2020, when the economic impact of the COVID-19 pandemic began to take hold, the chip industry had already begun to anticipate an increase in demand. According to the Semiconductor Industry Association, global chip sales fell 12% in 2019. But in December 2019, the organization predicted that the global chip industry would grow by 5.9% and 6.3% in 2020 and 2021, respectively.

The latest data shows that global chip sales increased by 29.7% between August 2020 and August 2021. Demand has benefited from technologies such as cloud computing and 5G, while various products such as automobiles and home appliances are also increasing their use of chips.

David Yoffie, a professor at Harvard Business School and former Intel director, said that working from home, home entertainment and e-commerce have led to a surge in demand for many high-tech products, which has surprised many people.

Chipmakers realized the continued strength of this demand only about a year ago, but the shift did not happen overnight. Building new chip factories costs billions of dollars and takes several years. "It takes about two years to build a new factory," said Yoffe. "And the factories are getting bigger, more expensive and more complex."

Sony and TSMC recently announced that they will invest $7 billion to build a chip factory in Japan that can produce old components, but it will not be put into production until the end of 2024. Intel is also investing in the construction of several new factories with advanced technology, but they will not be online until 2024.

Joffe pointed out that only ASML of the Netherlands, one of the world's largest semiconductor equipment manufacturers, can supply the extreme ultraviolet lithography machines needed to produce cutting-edge chips, which cost up to $120 million. But ASML cannot speed up the supply to meet the surging demand.

Equipment and materials shortages

Many items needed to make semiconductors are also in short supply. The substrates used to make printed circuit boards, the surfaces to which chips are attached, have been difficult to source.

These current plates are key to enabling chips to communicate with each other. Ron Olson, director of operations for the Cornell Nanoscale Science and Technology Research Center, also noted that some complex items related to the manufacturing process, such as personal protective equipment and gas pipes, are now experiencing delivery delays.

Building new factories and expanding the capacity of existing factories also puts pressure on the supply chain of semiconductor production equipment. "We tend to focus on chip factories, but chip factories need a whole set of things to become chip factories, and these things are now also out of order," said Chris Ober, a professor of materials engineering at Cornell University. "If everyone wants to make chips, they will rush to buy the same equipment."

There are only a limited number of highly specialized semiconductor equipment manufacturers with long lead times, and installing and testing the reliability of these devices in the factory is also time-consuming.

"It takes six months to a year to buy equipment, and then we have to do all kinds of process development and equipment qualification," Olson said. "It all takes time."

Labor shortage

To meet the growing demand for chips, in addition to building more chip factories, more people need to be hired. Semiconductor trade organization IPC released a report at the end of September saying that nearly four-fifths of manufacturers have difficulty recruiting suitable workers, and the problem is particularly severe in Europe and North America.

Employees need to be trained to handle the toxic chemicals used in chip production, creating another bottleneck for hiring new workers. Companies are now relying on higher salaries, more flexible work hours and training and education opportunities to attract new employees.

The Oregonian reported that Intel even placed "help wanted" ads on television and radio, specifically recruiting college students to work and study.

Resources are tilted towards cutting-edge chips, and old-fashioned chips are "difficult to produce"

This is where the further impact of insufficient resources becomes apparent - not all chips are created equal.

Simple semiconductor components such as power control chips, microcontroller chips and sensors have become the main source of shortages. These devices are far less complex than the CPUs and GPUs used in smartphones and game consoles, and the manufacturing processes used are not complex. But their applications are extremely wide, from microwave ovens to medical equipment to toys, almost all products use such electronic components.

Josh Pucci, vice president of electronic component platform Sourceability, said that power control chips used in many products once cost only $1, but now have skyrocketed to $150. IC Insights said that the delivery cycle of such components has been extended from 4-8 weeks to 24-52 weeks. Old chip production equipment is now difficult to find, and the shortage of these products has driven up demand for such equipment.

Market research firm Gartner estimates that global chip factory capacity utilization will reach 95.6% in the second quarter of 2021, compared with only 76.5% in the second quarter of 2019. Gartner analyst Gaurav Gupta said this shows that the factories are running at full capacity because some production lines need to be shut down for maintenance.

Tom Caulfield, CEO of chip foundry GlobalFoundries, said in October that his company had booked capacity through 2023. Analog Devices faces extremely high demand for some of its products, and the company's CFO told investors in August that orders have been scheduled through the next fiscal year, which begins this month.

Part of the challenge facing chipmakers is that some customers may "double book," intentionally purchasing more than they can to prevent a supply shortage, making future demand trends harder to predict. "The shortages caused by double booking make the situation worse," said Willy Shih, a professor at Harvard Business School.

In June this year, Musk also joked on Twitter that "every company is over-ordering because they are worried that there will not be enough. This situation is like a toilet paper shortage, but on a huge scale."

Analysts believe that companies that can produce these chips may be reluctant to invest in new factories because of the thin profit margins of such chips and the cyclical nature of the semiconductor industry, which often experiences sharp rises and falls in demand. They worry that a future oversupply of chips will drive down product prices.

“If you look at the history of the semiconductor industry, you’ll see that after a period of sharp profit and price growth, there will always be a severe downturn,” said Mr. Yoffe of Harvard Business School. “We have no idea whether the current demand growth can continue.”

While there is a lot of new chip capacity, most of it will be used to meet cutting-edge products. A Gartner report released in January this year predicted that chipmakers will invest $146 billion in new capacity this year, a 50% increase from 2019, but only a small portion of it will be used for more common older chips.