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By Leon Steyn – CEO of Dante Deo Company

What do graphic cards, laptops, gaming consoles, smart home appliances, smartphones, 5G-ready industrial and commercial equipment, and today's cars and trucks have in common? They all rely on semiconductor chips.

So, what happens when High-Tech and Consumer-Electronics Companies start to experience chip shortages and voice severe concerns about far-reaching supply-chain challenges set to disrupt manufacturers, dependent industries, and consumers worldwide? The vulnerabilities of Global Supply Chains in the Semiconductor Chip Manufacturing Industry and Trade Patterns are exposed.

In the first quarter of 2021, the scarcity of semiconductors stopped car assembly lines in their tracks globally, resulting in billions of dollars in lost revenue for the Automotive Industry. It didn’t take long for the impact of the shortage to be extended beyond the Auto Sector, with other industrial players struggling to procure chips.

What led to the global chip dilemma?

The short answer is that no single incident or disruption caused the semiconductor shortage. Instead, a confluence of global problems contributed to the deficit.

Many think that the chip shortage started in 2020 with COVID-19, but according to Taiwan Semiconductor Manufacturing Company (TSMC), the world's largest chip maker, the start of the microchip shortage can be traced back to 2018. Then, in the first half of 2020, the Auto Industry faced a substantial drop in demand.

As the pandemic unfolded around the world and chip production facilities closed in compliance with lockdown stipulations, early signs of fluctuating demand led to stockpiling and the advance ordering of chips by technology firms, which left others in the industry struggling to acquire components. With everyone going online to learn and work, people desperately needed tablets, webcams, and laptops, among many other network peripherals.

To meet urgent demand coming from outside the Automotive Industry, semiconductor manufacturers allocated stock to other industries because the automotive market was considered "soft" from 2018 to 2020. Then towards the end of 2020, demand for new vehicles unexpectedly took off again, which meant that TSMC had to reallocate its manufacturing capacity to support the Automotive Industry quickly.

With tensions rising because of the China–United States trade war, Consumer-Electronics Manufacturers hastily increased their chip-inventory level. The US Department of Commerce imposed strict restrictions on China's largest chip manufacturer ─ SMIC ─ in September 2020, making it harder for them to sell to companies with American ties.

Severe weather also played a role in the shortage, as a scathing winter storm rolled into Texas in February 2021 and forced the closure of two plants in Austin owned by Samsung and NXP Semiconductors. This shutdown resulted in a dramatic supply setback lasting several months.

At the same time, Taiwan experienced its worst drought in more than half a century, leading to severe problems among semiconductor manufacturers. To illustrate the gravity of the situation, TSMC’s facilities use more than 63 000 tons of water per day.

To make matters worse, from December 2021 to March 2022, the price of neon, which is needed for lasers, increased sixfold due to the pandemic and tensions between Ukraine and Russia. Given that Ukraine produces about half of the global neon supply as a by-product of the Russian steel industry and 90% of the semiconductor-grade neon used in the United States, the invasion of Ukraine sparked fears that the supply of neon would soon be depleted. The supply of krypton and xenon, of which Ukraine is also a major exporter, was also affected. Although Semiconductor Manufacturers tried their best to search for alternative suppliers during this period, new suppliers would take at least nine months to increase production.

On top of this, Russia exports 40% of the global supply of palladium, which is used in specific chip components. Sanctions imposed on Russia by Western governments could affect the supply of palladium.

Duration and effects of the crisis

The reality is that the chip shortage is unlikely to be resolved soon due to the complexities of the semiconductor production process. Lead times typically exceed four months for products that are already well established in a manufacturing line. Increasing capacity by moving a product to another manufacturing site isn’t ideal either, as this adds a further six months to the timeline.

And although leaders in the semiconductor manufacturing space such as Intel, TSMC, and Samsung are spending billions of dollars to build new manufacturing facilities, these investments will take three to five years to reflect progress. As such, the market for complex semiconductors (for example, microcontrollers, microprocessors, and FPGAs) will be constrained throughout the remainder of 2022, with the basic semiconductor market showing signs of pressure well into 2023.

What local businesses should be doing

It might be tough, but it’s imperative not to allow the chip shortage to dictate the direction of your business. Most businesses don’t have a choice and will have to use stop-gap solutions to combat hardware price increases and supply issues caused by the shortage, but business decisions should always be made with a clear, longer-term strategy guiding the way ahead.

A revised, data-driven replacement strategy needs to leave room for the expectation that there will likely be logistics and production challenges affecting companies’ reliability of assets from the desktop to the processing line. Shifting to a longer-term usage approach to assessing chip peripherals such as solid-state drives requirements could mitigate the risk in procurement delays.

These updated inventory needs, which include the possibility of procuring alternatives and increasing lead times, should be forecasted accurately and communicated both internally and with key suppliers and vendors that can be trusted to provide quality and seamless services when your business needs it most.

If we’ve learned anything during the last two and a half years, it’s that we’re living in a semiconductor world, and we won’t get far without them.