Why The Chips Are Down: Explaining the Global Chip Shortage | Jabil (2022)

The supply chain bottlenecks we're experiencing across the globe start with components. Rather, they start with component shortages. Of all the component shortages, by far the most severe is for certain semiconductors, or chips. The current global chip shortage rivals only a few of the past imbalanced markets. However, it's unique in the breadth of product families feeling the gap in supply and demand.

Despite headlines to the contrary, we are not experiencing an end to the global semiconductor shortages. Based on market data and conversations with our customers, we expect the basic semiconductor market to be constrained well into 2023, at least; the market for complex semiconductors (microcontrollers, microprocessors and FPGAs, to name a few) will be tight throughout 2023. There has simply never been higher demand for semiconductors. Globally, the semiconductor industry is expected to grow by approximately 7% between 2021 and 2022, from $595 billion to $639 billion —the first time the market has reached this revenue milestone.

A few segments in particular are fueling the current spike: the growth of the Internet of Things (IoT), 5G and automotive, especially the electrification of the automotive industry. Throughout 2022, some previously strong drivers of chip demand — consumer electronics like smartphones and laptops — has slowed, creating issues for companies that now have too much inventory or the wrong inventory mix. Still, soaring demand in these other areas is creating shortages of the semiconductors necessary to their creation.

Like most unpleasant things in our lives over the past two years, there is a single underlying cause of the global semiconductor shortage that is now prolonging and exacerbating it: COVID-19. The demand caused by the pandemic is straining capacity at all points of the supply chain, starting with component suppliers.

What's Behind the Ongoing Global Chip Shortage?

The COVID-19 pandemic kickstarted the chip shortage, and its long-reaching effects —including virus outbreaks, labor challenges and geopolitical uncertainties —have fueled it. Each link of the global supply chain continues to be extremely disrupted. Unfortunately, there are no signs of recovery in the near term.

This is because the pandemic also spurred a snap back in growth and demand so remarkable and unpredictable that supply chains will struggle to keep up until that demand falls to a more manageable level or more capacity and component supply chain issues are resolved. All commodities initially saw demand drop precipitously with the onset of COVID-19 and the shutdown of factories. Then, the massive consumer spending we saw after the pandemic's initial shocks had settled created a V-shaped recovery of the global economy, spurring an extraordinary need for semiconductors. Now, we are facing chip shortages, unprecedented lead times from analog suppliers and huge price increases. Risk has been elevated to unparalleled levels all along the semiconductor supply chain.

(Video) Why The Chips Are Down Explaining the Global Chip Shortage | MediaMatter

Why The Chips Are Down: Explaining the Global Chip Shortage | Jabil (1)

Impacts from this sustained demand are primarily being felt at wafer foundries. Wafer starts are the main constraint within the chip supply chain. Even the world's largest chip maker, TSMC—which controls 28% of global semiconductor manufacturing capacity —is experiencing ongoing shortages. To ramp up chip production, manufacturers including Texas Instruments, Intel and TSMC are investing billions of dollars into the construction of new fabs. However, this is not a quick fix; these new facilities aren't expected to be production-ready until 2023 and beyond.

International governments have also joined the push to increase chip capacity. In July 2022, the United States Senate and House of Representatives passed theCHIPS Act, which includes about $52 billion in government subsidies for research and production of semiconductors in the U.S. The bill also provides chip plants with tax credits worth about $24 billion, with the goal of spurring U.S. chip manufacturing to alleviate some of the supply chain issues hampering the country's automotive and consumer electronics industries, among others.

The European Union is planning a "Chips Act" of its own to increase the production of semiconductors within Europe, while South Korea has committed $450 billion to its own industry, and the Japanese government is partnering with TSMC and Sony to open a new fab by the end of 2024.

Beyond wafer foundries, wire bonding, substrates, materials and testing are all seeing shortages or delays. In China, continuous COVID-19 outbreaks and heat-induced power outages have impacted the supply of raw materials and assembly and testing. Further, the invasion of Ukraine has increased the prices and limited the supply of raw materials used in semiconductor production, causing turmoil throughout key markets for the industry.

This continued mismatch between demand and supply is pushing lead times ever longer. As of summer 2022, lead times for most semiconductors —no matter the type —are running at least 40 to 50 weeks, with many in the 50 to 60-week range. Essentially no waits are shorter than 30 weeks, but most are far longer (70-plus weeks).

Analog chip suppliers are seeing an average book-to-bill ratio (the number of orders placed vs. the number of orders filled) above 1:1, indicating backlogs. High-end semiconductors like microcontrollers (MCUs) and chipsets are still constrained, with positive book-to-bill ratios, but the decreasing demand for smartphones and consumer electronics will allow manufacturers to catch up on orders for other industries. Most of these high-end components are in allocation, with average lead times running 52 weeks or more.

(Video) Why is There a Global Chip Shortage?

Why The Chips Are Down: Explaining the Global Chip Shortage | Jabil (2)

As lead times have increased, so has pricing. Raw materials, foundries test and assembly, logistics and laborhave all become more expensive than ever. In turn, semiconductor suppliers are being forced to pass their costs on to their customers to help stabilize the supply chain. TSMC —again, the world's largest foundry supplier of 300mm wafers andthe most advancedprocess nodes —announced will raise chip prices by 6% in January 2023 after a 10% increase for high-end semiconductors and by 20% for less advanced chips in August 2021.

Across the board, chip suppliers have raised prices between 10% and 20%, on average, in response to supply constraints, increased shortages, costs of raw materials and inflation throughout the second half of 2022. Like shortages, price increases are expected to continue into 2023.

Having already taken blows from 2021 and 2022's uncertainties (so far), the markets that rely most heavily on chips —including automotive, 5G and the IoT and smartphones —are braced for more unknowns.

How Have Chip Shortages Impacted Markets?

The automotive industry has likely been impacted the most by the chip shortage. Depending on its level of connectivity, the average car can have more than 100 chips on board, with many vehicles requiring thousands of semiconductors to control safety features, the electrical and powertrain systems, infotainment, connectivity, and more.

As a TSMC spokesperson told Time, the roots of the industry's current chip challenges date back to 2018. Everything was becoming connected, from packaging to refrigerators, and smartphone demand was skyrocketing, but demand for cars was soft. To meet the need, semiconductor manufacturers began allocating more supply of now-critical automotive components like MCUs to other industries. This became a huge problem when car demand jumped unexpectedly in the last quarter of 2020 and continued through the first half of 2021 thanks to low interest rates and consumers having more expendable income than they anticipated.

By the spring of 2021, ramifications of the chip shortage had become clear to the auto industry. Factories have been forced to cut production or even close down temporarily due to parts disruptions. Putting more pressure on this limited supply of chips is the growing number of electric vehicle mandates being issued by governments around the world. Industry experts and auto makers have already expressed concern that a prolonged chip drought could delay the rollout of these new vehicles, particularly in the United States.

(Video) The global chip shortage, explained

Chip shortages are also driving up the price of new cars. The average price of a new car hit record highs throughout2021 and 2022, coming in at $46,259 in August 2022; the average price was $40,000 at the end of 2020. According to J.D. Power, while the number of new cars actually decreased 2.6% year-over-year between August 2021 and 2022 — due to a combination of supply constraints and a drop in demand caused by inflation and growing interest rates — consumer spend on new vehicles is up 13% in the same timeframe.

All told, it's believed the chip shortage cost automotive OEMs around $210 billion in lost revenues for 2021, with many individual brands continuing to bring in lower-than-expected quarterly results and adjusting their future financial targets as a result throughout 2022.

It's taken longer, but the smartphone market is also feeling the impact of chip shortages. Smartphone sales were on the rebound throughout 2021 after a 2020 dip, but in Q3, global shipments slid 6% when compared to Q3 of 2020; supply couldn't meet demand.

Gartner noted that smartphone companies are delaying launches of some of their most in-demand products due to the shortages, but production of basic smartphones is more heavily impacted than premium smartphones (sales of which are actually up). In a report tied to the third-quarter smartphone sales, an IDC analyst explained that supply issues for most smartphone companies won't be resolved until well into 2022. However, some of the most in-demand phones are expected to become more available by February 2022.

The chip shortage is also slowing or halting IoT projects —including the implementation of IoT modules that use 5G networks. Demand for cellular IoT chipsets and modules had been surging as companies worked to implement 5G technologies, but a 6% drop in shipments in Q3 2021 will hamper that growth. Every connected device, from smart meters to point-of-sales systems at retail stores, uses these chipsets, and this delay could further delay the long-awaited conversion from 4G to 5G.

Additionally, as the raw materials needed for semiconductors continue to be limited in supply, they will likely be first allocated to the high-end chips used in cars and smartphones, rather than the simpler microcontrollers and sensors used in IoT devices. A report from Forrester on IoT in 2022 predicts that it will take longer for the IoT market to regain the supply of chips needed to meet demand.

The full effects of the shortages have yet to be seen on 5G's rollout. However, a number of telecommunications companies warned the F.C.C. in June 2021 that a lack of chips could have significant impacts on the deployment of 5G connections.

So far, industries have dealt with the chip shortage in mostly short-term ways. The automotive industry has turned to on-the-fly decisions like cutting high-tech features from new car models. Meanwhile, the smartphone industry was able to ride out the early stages of the shortage by using semiconductors they had stockpiled at the beginning of the pandemic —a solution that, as previously mentioned, is no longer viable. Making it through this, or any, component shortage starts with a resilient supply chain strategy built on visibility, predictability and communication.

(Video) Global Chip Shortage explained: Why Computer Chips Are So Expensive Right Now!

How to Navigate the Global Chip Shortage

Perhaps the only thing that can be said with certainty about the global chip shortages is that no one is certain when they will end.If demand holds as expected based on market data and conversations with our customers, we expect the semiconductor market to be tight well into 2023.

All in all, the answer to this burning question is not "soon."

There's no easy way to get around a short supply of semiconductors and rising costs when every company is in the same boat. However, there's a big difference between a leaky kayak and a powerboat that is capable of navigating rocky waters. Every original equipment manufacturer (OEM) can take a series of steps to ensure they're in the best position possible as chip shortages persist:

  • Alignment: Your company's product design teams should stay aligned with your suppliers' technology roadmaps and capital investment plans to increase your chances of getting necessary components when you require them.
  • Supplier qualification: For common products, have multiple approved suppliers and continue to add to that list as suppliers grow their capabilities and offerings. Review and consider suppliers' global footprints as part of the qualification process to mitigate risks that might arise from having suppliers concentrated in a particular region.
  • Visibility: Provide as much visibility as you can to your suppliers so they can plan their product capacity and any potential longer-term capital investments. With some suppliers looking for 12 to 24 months of visibility, as soon as it's feasible, place long-term orders through the end of 2023 and even into 2024 to enable better visibility for wafer and capacity planning.
  • Increase lead times in planning systems and additional buffered inventories: With lead times increasing for most commodities, update your planning systems to reflect those delays accordingly. Pull-ins and support for unscheduled orders will be very difficult.

Why The Chips Are Down: Explaining the Global Chip Shortage | Jabil (3)

Both short-term and long-term strategies are necessary to withstand the challenges posed by the semiconductor shortage. This is not the only ongoing component shortage, and it certainly won't be the last.

The pandemic has thrown the global supply chain into disarray. But the challenges of the past few years have also revealed its deep interconnectedness and thus emphasized the critical importance of strong supplier relationships and a prepared, resilient supply chain and procurement strategy. Wherever the chips fall this time around, it's always prudent to have a plan.

How can Jabil's supply chain team help your business? Contact us.

(Video) Why the Global Chip Shortage Is Hard to Overcome | WSJ

FAQs

Why is there global shortage of chips? ›

Still, soaring demand in these other areas is creating shortages of the semiconductors necessary to their creation. Like most unpleasant things in our lives over the past two years, there is a single underlying cause of the global semiconductor shortage that is now prolonging and exacerbating it: COVID-19.

Why is the chip shortage a problem? ›

Chip shortages have forced some factories that rely on the components to make their products, like those of American carmakers, to slow or suspend production. That has dented U.S. economic growth and led to higher car prices, a big factor in the soaring inflation in the United States.

What are two reasons for the chip shortage? ›

This is due to several factors, including the pandemic, which has led to an increase in demand for electronics. Another factor is the US-China trade war, which has led to a shortage of raw materials. In conclusion, chip shortages in 2022 are likely to happen due to the pandemic and several other factors.

What is causing the chip shortage 2022? ›

But the larger impact has come from skyrocketing demand for technology products, and the long lead times required to build the fabrication plants that supply their chips has led to a chip shortage that has often played out unevenly but has affected nearly every end market in some way.

How long will global chip shortage last? ›

By the end of 2022, it predicts those lead times to be closer to 10–20 weeks and the industry will finally be in balance by early 2023. “Considering that chip shortages are likely to last through 2022, everybody should be prepared for longer lead times and possible delays.

What chip shortage means? ›

What Is the Chip Shortage? The chip shortage is not complicated. Basically, the growing demand for computer chips has outstripped the supply. As automakers and electronics companies continue to need a larger number of chips, semiconductor manufacturers simply can't grow their businesses quickly enough to keep up.

How can the chip shortage be overcome? ›

These include reducing a product's number of parts, reusing components, using standard design approaches and flexible product architecture wherever possible, and decoupling software from hardware. In a chip shortage, for example, the fewer “hooks” the product has into silicon, the better.

When did the chip shortage start? ›

A severe case of chip shortage occurred in 1988 after a pact between American and Japanese chip manufacturers resulted in severely reduced production. Changing to newer production methods also causes chip shortages as the new factories are not built quickly enough to meet the demand for the newer chips.

Why is there a shortage of everything? ›

While the supply chain shortages started with COVID, they're also due to increased consumer demand, which was fueled by the federal stimulus checks that we probably didn't need to keep the economy recovering. We just didn't understand how consumer demand was going to shift, once the pandemic began to ease.

Who are the 3 chip manufacturers? ›

As of 2021, only three firms are able to manufacture the most advanced semiconductors: TSMC of Taiwan, Samsung of South Korea, and Intel of the United States.

Who makes computer chips for cars? ›

Highlights : The global automotive semiconductor market size was estimated at USD 43.6 billion in 2021. Infineon, NXP, and Renesas were the biggest automotive semiconductor manufacturers.

Is the global chip shortage getting better? ›

Industry experts are projecting that the global microchip shortage – which has been hampering supply chains in several industries – will not improve before 2023.

Is the chip shortage getting better 2022? ›

Accordingly, the end of the chip shortage in 2022 is not yet in sight. Recently, Deloitte has said that it expects the semiconductor shortage to last until early 2023, with some customers waiting several months for their chip orders.

What are chips made of? ›

Silicon is the material of choice in the chip industry. Unlike the metals normally used to conduct electrical currents, silicon is a 'semiconductor', meaning that its conductive properties can be increased by mixing it with other materials such as phosphorus or boron.

Why are there no new cars? ›

A chip shortage has had a profound impact on the ability to buy a car. Supply chain problems have forced automakers to stop or limit the production of new cars, trucks, and SUVs.

Which cars are not affected by chip shortage? ›

Top 7 Cars Unaffected By The Chip Shortage
  • 2021 Hyundai Sonata.
  • 2021 Jeep Compass.
  • 2021 Nissan Titan.
  • 2021 Nissan Altima.
  • 2021 Ram 1500 Classic.
  • 2021 Nissan Sentra.
  • 2021 Volvo XC60.
  • 2021 Ford Expedition.
1 Sept 2022

Which stocks will benefit from chip shortage? ›

8 Best Semiconductor Stocks To Buy Amid a Global Chip Shortage
  • Analysts recommend these semiconductor stocks.
  • Taiwan Semiconductor Manufacturing Co. Ltd. ( TSM)
  • Nvidia Corp. ( NVDA)
  • Broadcom Inc. ( AVGO)
  • ASML Holding NV (ASML)
  • Advanced Micro Devices Inc. ( AMD)
  • Applied Materials Inc. ( AMAT)
  • Micron Technology Inc. ( MU)
27 Jul 2022

How the chip shortage is affecting the economy? ›

Supply chain disruption has grown to a top threat across industries. The chip shortage has brought car production to a standstill, delayed consumer electronics product launches, and impacted companies' ability to onboard new employees.

How will microchip shortage affect the economy? ›

“The problem,” noted Gaurav Gupta, semiconductor analyst at Gartner in a 2021 Accenture report, “is if that 10-cent chip is missing, you can't sell your $30,000 car.” The pandemic also drove up demand for electronics, including home office devices. And, as demand rose, supply chains slowed.

Are any microchips made in USA? ›

In 1990, the U.S. produced 37 percent of the world's semiconductors. But in part due to subsidies to semiconductor manufacturers by China, the European Union, Taiwan, South Korea, and others, today, just 12 percent of semiconductors are manufactured in the United States.

How are companies responding to the chip shortage? ›

Some companies will offload their excess, obsolete chips for a fraction of the price even though they may be needed later on. The distributors hold onto those products for a longer period of time in the event a manufacturer needs a particular make or model of a chip or part for a chip.

Does chip shortage affect electric cars? ›

The current semiconductor shortage is partly homemade - and was predictable. The overall situation will only improve in the medium term. Long waits, unscheduled handover dates – disrupted semiconductor supply chains significantly impair battery-electric car production.

Can you recycle semiconductors? ›

However, semiconductor materials have been the focus of some recycling methods. Zhan et al., (2020) developed an environmentally friendly and efficient hydrothermal-buffering technique for the recycling of GaAs-based ICs, achieving gallium and arsenic recovery rates of 99.9 and 95.5% respectively.

How many chips does a car have? ›

Electronic Control Unit modules in the modern car

Estimates say that there are roughly around 1,000+ chips in a non-electric vehicle and twice as much in an electric one. Imagine a PC or a mobile phone.

What raw materials are needed for semiconductors? ›

The most used semiconductor materials are silicon, germanium, and gallium arsenide. Of the three, germanium was one of the earliest semiconductor materials used. Germanium has four valence electrons, which are electrons located on the outer shell of the atom.

Does Toyota have chip shortage? ›

TOKYO, Sept 22 (Reuters) - Toyota Motor Corp (7203. T) said on Thursday it plans to produce about 800,000 vehicles worldwide in October, about 100,000 short of its average monthly production plan, due to semiconductor shortages.

Should we be stocking up on food 2022? ›

Prepping is the only way to protect yourself from shortages in 2022, as well as preparing for inflation. With products already in short supply, January is the time to start stocking up before the shelves are empty.

What should I stock up for winter 2022? ›

How to Stock a Pantry for Winter Weather
  • Bottled water (at least one gallon per person per day, for at least three days)
  • Canned goods, especially cozy, warming foods like soups and stews.
  • Snack foods like chips, crackers and cookies in sealed packages.
  • Cereal and granola.
  • Anything jarred, from jellies to pickles to meats.

Should we be preparing for a food shortage 2022? ›

Preparing for a food shortage is more important now than ever. Every day seemingly brings new alerts about shortages of essential foods. These shortages are typically limited to a few products at a time and tend to resolve quickly. But there's always a risk of food shortages happening on a global scale.

Will the chip shortage end in 2022? ›

As a result, through the end of 2022 and into 2023, chip supplies are expected to be in surplus in many chip nodes, which analysts expect will be absorbed through much of 2023 by customers.

Is the global chip shortage getting better? ›

Industry experts are projecting that the global microchip shortage – which has been hampering supply chains in several industries – will not improve before 2023.

When did the global chip shortage start? ›

What caused the global chip shortage? The main cause of this latest global chip shortage is the ongoing COVID-19 pandemic, which started in late 2019.

Who are the 3 chip manufacturers? ›

As of 2021, only three firms are able to manufacture the most advanced semiconductors: TSMC of Taiwan, Samsung of South Korea, and Intel of the United States.

Which car manufacturers are not affected by chip shortage? ›

Top 7 Cars Unaffected By The Chip Shortage
  • 2021 Hyundai Sonata.
  • 2021 Jeep Compass.
  • 2021 Nissan Titan.
  • 2021 Nissan Altima.
  • 2021 Ram 1500 Classic.
  • 2021 Nissan Sentra.
  • 2021 Volvo XC60.
  • 2021 Ford Expedition.
1 Sept 2022

Who makes computer chips for cars? ›

Highlights : The global automotive semiconductor market size was estimated at USD 43.6 billion in 2021. Infineon, NXP, and Renesas were the biggest automotive semiconductor manufacturers.

Why are there no new cars? ›

A chip shortage has had a profound impact on the ability to buy a car. Supply chain problems have forced automakers to stop or limit the production of new cars, trucks, and SUVs.

How do you fix a chip shortage? ›

Short-term solutions

With the chip shortage, this might entail removing nonessential features underpinned by unavailable chips, minimizing product customization, qualifying parts from multiple suppliers, or creating new products that rely on available chips and serve untapped market niches.

What country makes the most computer chips? ›

The country responsible for the most semiconductors in the world is China. China, which has the largest population in the world, has also recently become responsible for more semiconductors than any other country. On its own, China produces approximately a quarter of all semiconductors on the planet.

Why is there a shortage of everything? ›

While the supply chain shortages started with COVID, they're also due to increased consumer demand, which was fueled by the federal stimulus checks that we probably didn't need to keep the economy recovering. We just didn't understand how consumer demand was going to shift, once the pandemic began to ease.

Which stocks will benefit from chip shortage? ›

8 Best Semiconductor Stocks To Buy Amid a Global Chip Shortage
  • Analysts recommend these semiconductor stocks.
  • Taiwan Semiconductor Manufacturing Co. Ltd. ( TSM)
  • Nvidia Corp. ( NVDA)
  • Broadcom Inc. ( AVGO)
  • ASML Holding NV (ASML)
  • Advanced Micro Devices Inc. ( AMD)
  • Applied Materials Inc. ( AMAT)
  • Micron Technology Inc. ( MU)
27 Jul 2022

Are any microchips made in USA? ›

In 1990, the U.S. produced 37 percent of the world's semiconductors. But in part due to subsidies to semiconductor manufacturers by China, the European Union, Taiwan, South Korea, and others, today, just 12 percent of semiconductors are manufactured in the United States.

How many chips does a car have? ›

Abuelsamid says that every car has at least two or three dozen microprocessors, which control everything from infotainment screens to fuel management and stability control.

Who makes chips in USA? ›

List of Top 10 Semiconductor Companies in USA
#CompanyMarket Cap ($Billions)
1.Intel Corporation160.78
2.Nvidia414.20
3.Texas Instruments149.40
4.Micron Technology66.31
6 more rows
26 Jul 2022

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