The Global Microchip Shortage

As most people who keep up with the news know, the COVID19 pandemic has caused shortages in everything from cash to manufacturing supplies. Understandably, as the infection rate increased, the global focus was on finding a vaccine and securing medical supplies and equipment to save lives and slow the spread of the virus.  Many manufacturers who had the capabilities switched some or all of their production to life-sustaining commodities like ventilators and face masks, which were in immediate demand. Soon it became abundantly clear that many of these critical items had been outsourced to other countries, resulting in” centers of production” abroad that have attracted many companies in the U.S. and elsewhere to reduce costs. Since the timing of economic recovery varies from country to country based on containment of the virus, vaccinations, and other factors, the ramp-up period to restart production can be significant for some manufacturers, and the resulting delays are impeding other businesses down the supply chain.

Most Impacted Industries: Auto and Computing

Such is the case with microchips. Many experts believe that the present shortage of microchips will get worse before it gets better. Especially hard-hit are the car and computing industries.

The shortage of chips has triggered a shortage of cars as auto manufacturers are competing with other chip users for a diminished supply. Thus, the price of new and used cars is increasing as demand continues to exceed supply.

Yet, there is another cause of the chip shortage that isn’t obvious.  During the pandemic, many families were “stuck” at home for a long time. The sales of video game consoles, computer components, and other at-home entertainment skyrocketed as people needed something to do in their spare time. In 2020, for example, global videogame (PC games, console hardware and software, and direct mobile-game spending) sales were $191.12 billion. Prior to the pandemic forecasters predicted most growth to $195.29 billion in 2021 and to $195.8 billion in 2022. However, the increase in U.S. consumer spending on videogames from March 2020 to March 2021 alone jumped 32% to $59.6 billion from the same year-ago period. During the pandemic, video games have become a bigger industry than movies and North American sports combined.

The shortage is so significant that Intel CEO, Pat Gelsinger, predicts it will take up to two years to catch up with demand. And to confound the effort to restart production, a severe drought in Taiwan forced the country to divert water supply from a hub of semiconductor manufacturing, thus exacerbating the situation. As a result, Intel has had to outsource more of its production.

Intel is, however, making moves to deal with the shortfall. Earlier this month, industry veteran Shlomit Weiss returned to Intel to lead its consumer chip development team, after a four year absence. The company is also completing a large investment in its Irish facility and negotiating with the EU to bring a new, $20B factory to Europe.

Several countries are investing heavily in the construction of wafer manufacturing plants. Essentially, the microchip wafer manufacturing process involves melting and refining sand to produce 99.9999% pure single-crystal silicon ingots. Precision manufacturing saws the ingots into thin slices known as “wafers,” about as thick as a dime and several inches in diameter. Once cleaned and polished each wafer is used to build multiple chips. Because the raw material is sand, wafer manufacturers are not reliant on Asia-based suppliers. Unfortunately, the timeline to construct a wafer plant and ramp up production is about one year, and there is no guarantee they will be viable in the long-term.

The COVID pandemic continues to demonstrate the need for better planning for global threats, as well as the need to identify and address frailties in the manufacturing supply chains of many industries.