Reasons Behind the Global Chip Shortage
Since last year, the world has been experiencing an electronic chip shortage. The chip industry cannot cope with the growing demand from the automotive sector and the entire electronics industry. They cannot currently keep up with the exponential demand from the man industries that use chips in their production, including smartphones, auto, computers, connected devices, etc.
This article shares some reasons for this global chip shortage to give you an insight into this phenomenon.
Reasons Behind the Global Chip Shortage
The current scarcity has a difficult solution in the short term since investment in the chip industry does not pay off overnight. It is a very capital-intensive industry, which requires a significant investment to grow and qualified personnel.
On the other hand, demand has increased due to cyclical factors (economic recovery and greater demand during Covid) and structural factors since many products need a microchip.
Let’s discuss these factors in detail!
The Economic Factors
The first reason is the COVID-19 crisis and the Delta variant, plaguing the Southeast Asian region. Many of the microchip factories are located in Vietnam, Malaysia, Thailand and Indonesia. The first waves had forced the factories to close.
When they reopened, they were already overwhelmed with demand from the entire electronics industry and car manufacturers. But the arrival of the Delta variant changed everything in the industry, and several factories closed again. The closures, therefore, have consequences for European firms.
Lockdown and the generalization of telework resulted in the explosion in purchases of laptops, smartphones and even game consoles during this pandemic period.
Two recent events have weighed on the semiconductor market in this tense context. A fire, first of all, affected last March, one of the most important manufacturing factories of semiconductors intended for automobiles in Naka in Japan. The production of the Taiwanese factories then had to be slowed down due to the drought and the difficulty of bringing water to the semiconductor factories, which are large consumers of water.
The Structural Factors
Electronic chips’ production follows a cycle comprising regular oscillations between under-supply and over-supply. The shortage is, therefore, an inherent component of the semiconductor market. Beyond these cyclical aspects, the electronic chip shortage can also be explained by a structural factor due to the specific functioning of this market.
Substantial investments, both physical (factories, production lines, etc.) and in research and development carried out by semiconductor manufacturers, do not immediately translate into an adjustment of supply to demand. In this context, the shortage of microchips lasted several weeks and can happen again in the years to come!
Geopolitical Reasons
The geopolitical issues are numerous and are mainly the result of the trade conflict between China and the US. China has significantly strengthened its autonomy in the electronic chip market by training more and more design engineers who participate in the entire manufacturing process and is positioning itself in competition with the United States.
Former US President Donald Trump’s blocking of Chinese company Huawei’s use of US raw materials has disrupted the Chinese electronics industry and intensified the trade war between the two countries. Despite the initiatives for international cooperation to improve the supply chain in the face of the electronic chip shortage, the trade war continues.
Another major geopolitical reason is the pressure on access to materials. There are more than 60 elements from the periodic table in a microchip. Like the silicon mainly present in the manufacture of an electronic chip, these elements are not necessarily rare. Still, there is often pressure between exporting and importing countries to access the resource.
What can Companies Do in the Face of this Global Chip Shortage?
The shortage is a problem for businesses worldwide. The challenge for companies is to ask for more time, to slow down the process of their production and have to negotiate supply contracts knowingly to have a smooth transition because this crisis will last.
Companies must think in the long term and observe the markets so as not to pay too much for the batches of electronic chips. When negotiating the contract, they have to be quite flexible with customers and suppliers.
Everything depends on the company’s situation, but what is certain is that this shortage is likely to impact the industry for a few more years.
If you’re looking for such scarce electronic parts and components, including electronic chips, Integrated circuits (IC), diodes and more, contact Summit Electronics, a global distributor sales agent for these electronic parts. Summit supplies electronic parts to a wide range of industries. Call at (561) 226-8500 or visit their website for more information.
