April 15, 2021 | Short Summary: The Global Chip Shortage
Why does a global shortage of semiconductors matter? Today we explore the short-term and long-term implications
COVID-19 and US-China tensions have led to a global microchip (semiconductor) shortage. But if you’re like me and not an expert in semiconductor supply chains, it can be difficult to grasp why this matters. Let’s look at the short-term and long-term implications.
In the short term, specific industries and companies will be deeply impacted by this shortage. In the long run, this supply chain disruption will push major powers like the United States and China to take steps to reduce exposure to these highly globalized supply chains.
Industry experts and insiders estimate the semiconductor shortage will last at least two more years. Therefore it’s imperative for key stakeholders to consider the longer-term implications. The world won’t be standing still in the meantime, either.
We need to start by recognizing that nearly every person on the planet interacts with microchips in their daily lives. Computer chips of all shapes and sizes are found in everything from mobile devices to cars to refrigerators to ballistic missiles. Chip shortages lead to supply chain bottlenecks, leading to shortages of key consumer products. Let’s explore the root causes of the shortage first.
There are two primary causes for the chip shortage:
COVID-19
The rise in US-China tensions
COVID-19 and its corresponding economic lockdowns have distorted the supply and demand dynamics for key consumer goods. Because lockdowns forced millions worldwide to begin remote work, the demand for technologies used to facilitate remote work (PCs, laptops, etc.) rose drastically in 2020. Conversely, the demand for products commonly used before the pandemic, like automobiles, dropped.
These consumer products depend on semiconductors, which means whenever the demand for the finished product (PCs, automobiles, etc.) changes drastically, so too does the demand for the chips on which these products depend to function. So what ended up happening is chip manufacturers began devoting production capacity towards the higher-margin chips found in PCs and mobile devices. This shift in production came at the expense of cheaper, lower margin chips frequently used in automobiles.
The warped global supply and demand dynamics are also attributable to ongoing geopolitical tensions between the United States and China. A major factor behind this chip shortage stems from the US imposition of bans on technology exports to China in 2019. Because China is fully dependent on US chips, it had no choice but to begin hoarding chips before the bans took effect.
The chip shortage's direct impact is one thing, but on a deeper level, this is serving as a wake-up call for national governments and corporations. The global pandemic has revealed massive vulnerabilities in semiconductor supply chains. This isn’t necessarily something new. For instance, China has already been driving a shift towards ‘indigenous innovation’ for more than ten years. And its ongoing dual-circulation economic strategy is a direct attempt to reduce China’s exposure to global trade volatility. Part of both of these strategies includes reducing China’s dependence on US-designed semiconductors and driving a national effort to propel China up the chip production value chain.
In many ways, it makes sense to look at advanced computer chips as the new oil. In fact, semiconductors may be more important than oil — it’s incredibly difficult to overstate global dependence on semiconductors. As emerging technologies grow more powerful, they will continue to become more integrated with humanity at all levels. Advanced chips will be the underlying force powering militaries, global transportation, logistics, advanced computing, healthcare, and communications: literally, everything that matters.
Long-term we should expect to see the United States initiate its own push for something like China’s “indigenous innovation.” Although the United States is already the world’s undisputed leader in multiple segments of the chip production process, the production of a single computer chip requires more than 1000 discrete steps passing through international borders 70 or more times before reaching an end customer.
Although the United States and China have benefitted immensely from the three-decade-long expansion of hyper-globalization beginning around 1990. The global semiconductor shortage reveals a strategic imperative to protect against the risks of the reversal of many of these secular trends. We already know China is growing more inward-focused, we must now determine whether the US is intent on doing the same.
Additional Reading
The Geopolitics of Semiconductors
The process of designing, testing, manufacturing, and packaging semiconductors—the integrated circuits that power modern smartphones and computers—is fiendishly complex and capital intensive. From its origins in Silicon Valley, the semiconductor industry has evolved over decades under intense competitive pressures into a highly specialized global industry. This evolution is now having geopolitical consequences.
Global Chip Shortage: The Winners and Losers
Computer chips, or semiconductors, power everything from cars to consumer electronics, such as PCs, gaming consoles and smartphones. The recent shortage in this valuable resource has significant implications for consumer prices, company profits, employment, inflation, and even national security.
It’s a Roller-Coaster Ride’: Global Chip Shortage Is Making Industries Sweat
The internet-connected world is completely dependent on the production of semiconductors. That’s become a problem now that supplies are running short.
Chip manufacturer TSMC warns shortages could continue through 2022
TSMC, which makes processors for Apple, Qualcomm, AMD, and numerous other big consumer tech companies, has warned that chip shortages could last through 2022. “We see the demand continue to be high,” TSMC CEO C. C. Wei said in comments reported by Bloomberg, “In 2023, I hope we can offer more capacity to support our customers. At that time, we’ll start to see the supply chain tightness release a little bit.”
Global chip shortage on agenda as White House convenes US CEOs
Senior White House officials will meet on Monday with top executives from nearly 20 major companies in the United States to discuss a global semiconductor shortage that has roiled the automotive industry and technology firms.
The White House meeting is billed as the “CEO Summit on Semiconductor and Supply Chain Resilience” and will include White House National Security Advisor Jake Sullivan and National Economic Council Director Brian Deese.
Intel, Nvidia, TSMC execs agree: Chip shortage could last into 2023
How many years will the ongoing chip shortage affect technology firms across the world? This week, multiple tech executives offered their own dismal estimates as part of their usual public financial disclosures, with the worst one coming in at "a couple of years."
The Semiconductor Supply Chain: Assessing National Competitiveness
Semiconductors are a key component in fueling scientific progress, promoting economic advancement, and ensuring national security. This issue brief summarizes each component of the semiconductor supply chain and where the United States and its allies possess the greatest leverage. A related policy brief, “Securing Semiconductor Supply Chains,” recommends policy actions to ensure the United States maintains this leverage and uses it to promote the beneficial use of emerging technologies, such as artificial intelligence.
Photo by Brian Kostiuk on Unsplash