Why Is There A Global Semiconductor Shortage And How Can We Solve It?

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The fact that you may have recently had difficulty getting hold of the latest models of televisions, smartphones and games consoles is just the tip of the iceberg. Every industry is currently experiencing a severe shortage of semiconductor materials needed to build the chips that power everyday electrical gadgets and devices.

Semiconductors – materials that can be used to vary the flow of electrical signals around circuits, therefore enabling modern electronics – include materials like silicon and germanium and gallium arsenide. They are mined from the ground and transported around the world to fabrication facilities where they are used to build basic components like circuit boards, micro processors and diodes.

These fabrication plants (known as “fabs”) are run by some of the largest manufacturing companies in the world, such as the Taiwan Semiconductor Manufacturing Company, Samsung in Korea and China’s Semiconductor Manufacturing International Corporation.

All of these companies have been affected by an ongoing global shortage that began in 2020 and so far is showing little sign of letting up. But considering the growing demand for technology and devices is well understood, how did we get into this situation?

Why is there a semiconductor crisis?

Industry analysts have said that there are two major driving forces behind the shortage, and both can be traced to the ongoing global coronavirus pandemic.

Firstly, the pandemic has greatly impacted manufacturing, logistics and distribution operations around the world. Staff sickness levels have increased, border restrictions have disrupted transport links and manufacturing plants have reduced their capacity.

At the same time, demand has skyrocketed. With many companies switching to work-from-home models, and people increasingly spending more of their lives online in the digital domain, manufacturers have found it increasingly difficult to keep up with the demand for computers, tablets, smartphones, consoles and many other devices.

There are no easy fixes for this – primarily because the semiconductor manufacture and supply industries consist of a long and complex supply chain. According to analysts at Cullen International, no country in the world has reached a stage where they are self-sufficient across research and design, mining, manufacturing and testing of semiconductor-based components. For example, companies such as Apple and ARM design processor chips in-house in Europe or the US, while materials to manufacture them are mined in China and Russia, and the world’s largest manufacturers are based in Korea and Taiwan.

Many other factors have contributed to a “perfect storm” of disruption – not least of which is Russia’s invasion of Ukraine, which the US Government has said is likely to cause further disruption, and a 2021 drought in Taiwan, which caused shortages of the ultra-pure water needed to wash silicon wafers during manufacturing. In addition, chips are now in demand for “smart” versions of many other products which traditionally would have been entirely analogue – such as lightbulbs, kettles and scales.

What is the impact of the crisis?

A Deloitte report has found that shortages are likely to continue throughout the first half of 2022, with the impact is likely to continue to be felt well into 2023. This will take the form of increased prices for goods that include electronic components, including cars, which have increased in price by an average of 10% since the start of the crisis. There will also be supply shortages and many consumer items will be difficult to get hold of.

Cloud service providers will also be impacted, due to a shortage of chips and other components used to build and control their servers, this is likely to lead to price rises for the growing number of companies that rely on cloud to deliver their IT infrastructure to customers.

A less obvious casualty is the dog-washing industry – with one supplier of automated dog-washing machines to the US military hit by increased costs.

How can it be solved?

Given the reliance of the modern world on technology, the crisis is being treated as a priority challenge by businesses and governments. China, for example, has identified the need to become self-reliant in designing, material mining and manufacturing as a strategic priority in its current five-year plan. To achieve this, it is creating incentives for companies that can grow its R&D and IP development capacity – the link in the supply chain which has traditionally lagged in the republic.

The EU on the other hand, is seeking to increase its manufacturing capacity and therefore reduce its reliance on the manufacturing giants of Asia and the US. As part of this, the European Commission launched the Chips for Europe Initiative, with the aim of eventually pumping close to $50 billion into the industry. The UK government also moved to block the proposed purchase of chip designer ARM by Nvidia, in order to avoid access to its skills being restricted.

In the US, congress has also recently passed an infrastructure deal designed to inject $50 billion into semiconductor manufacturing, in a bid to reverse a trend which has seen US share of global production slip from 37% in 1990 to 12% today.

As the role that technology plays in all of our lives continues to grow, it’s clear that the need for robust and resilient supply chains for essential components is only going to increase. As a futurist, I believe that technology is on the way to providing solutions to many of society and the world’s most pressing problems – from famine to disease and global warming. Of course, in order for this to happen we need to ensure businesses and individuals have access to the tools and devices that can make this happen. It’s reassuring to see that governments are acting now to prioritize their supply, but steps must be taken to ensure that foreseeable problems such as the one we are facing now do not return to cause disruption in the future.

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