What caused the global chip shortage?

Just when I was planning to build a new computer to replace my old and outdated one, I discovered that this is probably the worst possible time to do so. In case you are a gamer or related to the industry, you may already know it. The prices of PC components, especially of Graphics Cards, have sky-rocketed. If you were planning to buy a new pc or gaming setup, you might find it difficult for now. 

So, why is it so hard to find computer components right now?

Well, it is not just the computer industry that is facing a crisis. Currently, the world is dealing with a massive global shortage of semiconductors, and, as a result, every product – computer, car, mobile, television, refrigerator, credit card - that uses them has been impacted by it.

 

First of all, what is a semiconductor and why is it so important?

A semiconductor is a physical substance that manages and controls the flow of electricity in electronic equipment. Semiconductors are everywhere. In fact, it is remotely impossible to imagine the modern technological society without this vital ingredient.

Semiconductors are made of silicon, a substance that is abundant in nature. Silicon is found in minerals that make up 90% of the earth’s crust. The use of silicon allows the chips to become smaller. This extraordinary substance has revolutionized technological advancement. Currently, the semiconductor industry is worth about $500 billion, and it is expected to reach a $3 trillion valuation in near future.

Semiconductors have changed our world. Almost every electronic device we use – from computers to home appliances such as a microwave or even a toothbrush – has a semiconductor chip. Usually, every single electronic product these days has these chips. In short, these chips allow the electronic devices to do what they are designed to do.

 

What caused the global chip shortage?

How could we run out of such a crucial element of the modern world? In short, the demand has significantly outstripped the supply.

We are in the middle of a pandemic currently. As expected, it has impacted many sectors. The global chip shortage seems to be triggered by the soaring demand due to the pandemic. When the pandemic (covid-19) hit last year, many big corporations forecasted a notable reduction in their sales revenue. However, the scenario quickly changed when people were forced to stay at home and work remotely due to lockdown and social distancing. The demand for electronic devices soared during the pandemic. Forced to work from home, people had to upgrade their system. Locked and bored at home, people opt for entertainment. Work, online classes, entertainment - suddenly all homes became a digital hub. People started doing basically everything from their homes. As a result, the demand for electronics went up. The year 2020 saw a significant boom in the computer market. The global semiconductor sales increased by 6.5% in 2020.

The pandemic partially forced people to seek home entertainment. People bought home theatres and smart speakers. Entertainment became a huge factor during the pandemic. Movies, TV series and video games became an escape route in the stressed life. The video game industry also flourished during this time. People played lots of video games. Online video game platforms like Roblox thrived.

Not just home entertainment, businesses needed their own setup too to deal with the pandemic. Companies installed their own cloud system and work-from-home infrastructure. Meetings were being held online. Suddenly, they had to buy an awful lot of upgraded electronic devices. Homes were required to buy more gadgets to allow everybody to keep up with their work. This massive growth in demand caused a disruption in the supply chain.

 

Does Cryptocurrency boom have anything to do with it?

Well, it certainly isn’t helping. The graphics card prices have hit the moon recently. We are witnessing a cryptocurrency boom right now. The year 2021 has been a pretty eventful year for cryptocurrencies. Bitcoin, Ethereum, and other digital currencies' prices increased significantly. Adding to it, non-fungible tokens also emerged as a great trend. Digitals assets have been sold for millions. This noteworthy change in the market has also increased the mining competition. Surely, miners aren’t going to sit down idly during the hottest time of cryptocurrency history. Mining farms are popping all around the world and miners are joining the race ever more enthusiastically.

The miners do have their own specialized mining machines – ASIC. But, you have to note that the cryptocurrency market hit the sky at a fast speed. Building an ASIC machine is incredibly costly. The cryptocurrency crash back in 2016 put a break in manufacturing and upgrading of the ASIC machines since many people had stopped mining. Now that the crypto market is thriving again, people are coming back to mining.

Graphics cards are an easy way to enter the mining game. The demand for amazing graphics cards like RTX 2070, 3080 ti, and RTX 3090 has increased remarkably. These great quality graphics cards have amazing hash rates that are perfect for cryptocurrency mining. When added in numbers, these cards become more efficient mining rigs. For this reason, many people blame miners for stockpiling graphics cards. However, it's hard to back the claim since it is difficult to track ultimately who is buying those cards.

 

Demand for semiconductor chips is also increasing

It's not about just computer components and mining rigs. Our highly increasing technological society also requires an increasing number of semiconductor chips. Everything we use today has at least one of those chips. Our gadgets are getting smarter and more complex, and, therefore, they require more chips. For example, modern cars are getting smarter. These high-tech new-age cars easily have hundreds of semiconductor chips for their components like infotainment systems and other functions. Everything from brakes to power steering, to doors, to back cameras, contain chips. These cars can contain hundreds of semiconductor chips easily, sometimes are up to thousands for more advanced cars.

 

What are the consequences of the chip shortage?

When a vital element of the modern technological world becomes scarce, it is almost inevitable that several sectors will be impacted. According to Goldman Sachs, the global chip-shortage directly impacts 169 industries. The crisis has spread from computers to car manufacturers, to home appliances. The auto industry became the worst victim of the shortage. The industry is expected to lose $110 billion in revenue this year.

When the pandemic hit, car manufacturing companies predicted a reduction in their sales revenue. The companies like Ford, Honda, Audi, GM, and Volkswagen shut down a portion of their facilities and sent their workers home. The forecast was temporarily true, but the industry quickly started recovering as people didn’t want to rely on public transport during a pandemic. However, companies had already canceled their semiconductor orders. This decision caused the chip suppliers to divert their parts to other sectors. As a result, the automobile industry was left in the cold. The companies are now trying to cope with the situation by cutting some of their features from the cars. For example – Nissan is dropping its navigation system.

Ford expects its revenue to be lowered by $2.5 billion this year. General Motors expects a $1.5 billion reduction in its revenue. Tech giant Apple was also affected by the shortage, as it forced the company to delay the launch of the iPhone 12. Apple said the chip shortage could cost them $3 to $4 billion in sales this year. Sony is struggling to meet the demand for their new PS5. Samsung and LG are also facing trouble in selling their products.

 

Problem exacerbated by other issues:

The ongoing trade dispute between  the US and China isn’t also helping the situation. China has been trying to achieve self-sufficiency in the semiconductor industry through investing a gigantic amount of money. The US considers it as an ill practice and harmful for the market. The boiling tension between the two countries caused them to impose bans and tariffs on each other. The US imposed bans on Chinese companies like Huawei in using their design. This trade situation might have triggered companies to hoard chips, according to many. Adding to the existing problems, a fire in a key chip-making plant in Japan, and an ongoing drought in Taiwan, have worsened the crisis. Taiwan's TSMC is the biggest supplier of semiconductor chips.

Why can’t we just increase supply?

It is not a simple job. Chip manufacturing is an extremely complex process. There are only a handful of companies in the world. TSMC (Taiwan semiconductor manufacturing company) alone supplies more than half (53%) of the world’s demand. Samsung and Global foundries are other notable companies that manufacture chips.

It's not possible to simply increase the production because the plants are already running at full capacity. It is also very difficult to install manufacturing plants in a short time. First of all, it takes a huge amount of investment – about $10 to $15 billion. The industry is also brutal. The companies always require to be updated in technology. Otherwise, they will lose money. Secondly, chip manufacturing takes time – usually between 3 to 6 months. The facilities require giant factories, million-dollar equipment, delicate machines, dust-free facilities, tin, and lasers. You can’t just install the facilities and gain results in months.

When will the crisis end?

It is very hard to come up with an exact timeline. Some reports claim it will be 2022, and some reports claim it may reach 2023. Some predict the situation will become better when the pandemic begins to slowly recede. Some think a cryptocurrency burst might help the situation. Countries are dealing with the problem in their own way. The US government has sanctioned a $50 billion investment to deal with the crisis. We can only hope for better.