The Semiconductor Crisis

The semiconductor crisis has been the talk of the town lately. Who knew the dearth of such a tiny component in the manufacturing process will jolt industries; influence their decision-making and hamper their ability to pick up revved up demand?

Let’s navigate through various aspects of this crisis and find out the underlying reasons for the above events.

Semiconductor chip found in computers, gaming hardwares, smartphones, automobiles etc. is a component which conducts electricity. A smartphone has nearly 460 billion of these. Its main function is to amplify signals and convert energy. US-based Intel Inc., Nvidia Corp and Qualcomm Technologies Inc are the three leading chip makers apart from South Korea’s Samsung and SK Hynix.

What led to the Crisis?

These chips have been in paucity since last November. Unequivocally, the Covid-19 pandemic is to blame for the shortage, since lockdowns across various countries caused crucial chip-making factories in China, the US, South Korea to halt operations.

As people started preferring personal cars to public transport, the demand for cars swelled and the chipmakers were unable to meet the rising orders.

US-China tensions are also part of the story. Last year, the US banned foreign companies whose chips use American technology from selling to the Chinese tech giant Huawei which then began to stockpile chips, along with other companies thus, further straining supplies.

According to a Bloomberg report, which quoted research by Susquehanna Financial Group, the chip lead time increased to 17 weeks in April, from around 12 weeks in the beginning of 2020. (Chip lead time is the gap between when a chip is ordered and when it is delivered.)

Moreover, it is not something whose production units can be set up overnight in a new place. It’s a capital-intensive process (setting up a new plant would cost about 5-10 billion USD) and takes weeks to set up and roll out the production smoothly.

What has been the Impact of the Crisis?

The famine of these chips has dealt a huge blow to industries who are its primary users, namely, car manufacturers and commercial electronic device manufacturers. The crisis has catapulted car manufacturers into a situation where they have to delay vehicle launches. For instance, Mahindra & Mahindra is factoring some delays in the launch of its flagship Mahindra XUV500 and new Scorpio.

Carmakers have also started discarding some high-end features ad interim. Japanese carmaker Nissan is leaving navigation systems out of thousands of vehicles, while French company Renault has stopped offering a larger digital screen behind the steering wheel on its Arkana SUV.

Production processes are also being curtailed by many makers. Suzuki Motor Corp has already announced production cuts at its Gujarat plant and limited the work to one shift. Among global carmakers, Ford Motor Co said in a conference call in April that it is likely to lose about half its second-quarter production to the chip shortage.

Even though sales were on the rise after the lockdown and the festive season round the corner will further soar the demand, manufacturers still may not be able to meet the demand.

Analysts also point that continuing the squeeze could lead to higher prices for customers. SEB, a French maker of kitchen equipment such as blenders, has reported that it is being forced to hike its prices.

How is it being dealt with?

In India, the Ministry of Electronics and Information Technology is seeking out foreign capital to set up semiconductor manufacturing factories in India and has received more than 20 Expression of Interests (EoIs). The GoI has also announced a $1 billion incentive for chip-makers who manufacture in India. Tata group is also looking forward to seizing this opportunity.

The European Union, which currently accounts for less than 10% of the global production, has aimed to ramp it up to 20%. Intel has come forward to invest $20 billion towards building a semiconductor factory in Europe.

The South Korean government has also announced a whopping $450 billion investment in its bid to become a semiconductor giant globally.

It is predicted that the crisis could stretch upto 2022 and even to some parts of 2023!

Many countries are eyeing this lucrative opportunity but it will certainly take time to show results. We hope that the crisis is resolved as soon as possible. Till then read our other publications!