Find Out why there was a Global Chip Shortage in 2022, Know the cause of the Global Chip Shortage, that is affecting Automobiles, Desktops, etc.
Many companies are already getting affected by it. Gaming consoles and top-end GPUs of AMD and NVIDIA are hard to find since launch. But the impact of this shortage is affecting almost every other industry too.
Truckmaker Volvo and the electric automobile company Nio Inc and many others have stopped their production in assembly lines due to chip shortage.
The chips used in the chips for our PCs, Phones, Cars, etc are all made by some manufacturing companies. A few big names of these semiconductor manufacturing companies are Taiwan Semiconductor Manufacturing Companies & Samsung Electronics.
Explained: What Caused the Global Chip Shortage
Samsung and TSMC are responsible for fulfilling the majority of Silicon needs of companies globally.
The Global Chip Shortage 2022 is not caused by the lack of manufacturing, it’s the unexpectedly high demand for Semiconductor chips that have made the supply insufficient. The Global Chip Shortage is at an all-time high.
TSMC has upped their manufacturing year over year, and even right now they are running at close to full capacity.
The problem isn’t production, the problem is the unexpectedly high demand.
The demand has risen so much, that Intel, a company that currently is losing its market in the Processor business, has decided to enter silicon manufacturing. The company plans to set up Semiconductor manufacturing in Arizona, costing the company about $20Billion.
As the pandemic hit, automobiles and consumer electronic companies were bearish, and as a result, they reduced the reserved fabrication capacities that they had booked with TSMC/Samsung Foundries.
However, as it turns out the demand dropped for a few months, but it was really quick to revive.
But the return of demand, sounded like a good thing, the struggle came to keep up with the demand, now TSMC and other Silicon companies had already sold their fabrication capacity to other companies. This created imbalance in demand and supplies which is one of the reasons, why there is a global chip shortage in 2022.
These things increased the demand for chips, as a result even though the chip manufacturers were working hard, they still couldn’t meet this demand.
But big question is, why is there a high demand for semiconductors?
Contributing Factors for Global Chip Shortage
Many things together contribute to the demand increment.
As it turns out the Global Chip Shortage in 2022 was caused due to unexpected increase in demands. After the pandemic hit hard, many industries, especially the automobile industry had underestimated their chip needs.
However, the production of Semiconductors was mostly intact. The problem arose, because of an imbalance in demand.
Here are the major areas that increased the Semi-Conductor demand:
- PlayStation & Xbox
- New GPUs – RTX 3000 series and Radeon 5000 series
- Increase in Crypto Miners
As the Work-From-Home culture began, it brought with it the need for people to upgrade to newer machines for better performance, or webcam, etc. Kids started attending classes from home requiring a device of their own.
PlayStation and Xbox
PlayStation and Xbox are updated every 7 years. People planning to buy a Console, often hold it when the new console is around the corner. As 2020 was the year of the release of consoles, there was an expected increase in demand for them.
RTX 3000 and Radeon 5000 Series
Graphics cards are always in demand, and this sector was the first one to be hit with the shortage of semiconductors.
To understand why there is a global chip shortage in 2022, we need to understand that gamers and professionals with Graphic intensive work are always waiting for a great update to graphics cards.
2020 was the year when AMD and NVIDIA both brought major updates to their graphics cards. This brought a lot of people to buy a graphics card.
Bitcoin is breaking records every other day, and other cryptocurrencies are also gaining momentum, people are mining cryptocurrency more than ever before.
This has further increased the demand especially due to the increasing trend of Etherium and Dogecoin. In case you are interested, I Predicted the chances of Dogecoin reaching $1 in 2022
The automobile industry is going electric, and lots of big companies need more and more chips to power them.
Tesla leads the industry, but even modern gasoline cars need proper high-performance chips, this budding industry added fuel to the already big fire of Global Chip Shortage 2022.
Even though the chipsets used in servers are different, they are built from the same silicon produced in these factories.
Services like Zoom, Microsoft Teams, and even YouTube had to face server limitations at the start of the pandemic as people were using these services more than ever before, this further increased the demand contributing to the global chip shortage 2022
As you can see most of the factors for the increase were temporary, these factors aren’t recurring, for example, the Next PlayStation/Xbox will come out in 2027, which means the demand for semiconductors in PlayStation will only decrease with time
The same is true for graphics cards, these were major graphic cards released, newer cards shall keep coming, but won’t have that high demand.
Servers also buy high-quality semi-conductors as an investment that lasts for Multiple years. However Automobile still requires more and more semiconductors, crypto mining also doesn’t seem to slow down.
But these all were expected. AMD and NVIDIA had long before got estimates for demand and made necessary reservations.v Of course, this demand added to the Global Chip Shortage 2022, but it’s important to understand that a major crisis exists due to unexpected demands.
This is majorly due to general consumer electronics, and automobiles. Companies like TSMC, get reservations for their fabrication capacity months in advance
Will the Global Chip Shortage end in 2022?
Now that we know what is global chip shortage, and why it was caused, let’s answer the most important question, when will the Global Chip Shortage end? or more specifically, Will the Global Chip Shortage end in 2022?
The condition of the global chip shortage is gradually improving, and the situation at the end of 2022 will be significantly better than the situation at the start of 2022.
The increased chip production and repurposing of existing silicon have brought many production lines to start production in limited quantity.
Though the scarcity is still big. The Global Chip shortage will end in 2022 if we ensure no spike in demands while maintaining 100% production.
Companies are resorting to weird measures to ensure their production lines keep working. For example, automobile companies like Tesla are shipping some of their vehicles with incomplete infotainment systems, which might omit things like USB ports and more. They promise to fit it later when the supply is back on track. This ensures that the cost of the product and the supply can be maintained with or without these parts.
Chip manufacturers are using the old stock of slightly older yet still effective technology to maintain supply. These days companies eye on getting the semiconductors with the smallest transistors, some even ranging to as small as 3 or 5 nanometers. These are difficult to manufacture. Hene they resort to using slightly bigger, inefficient yet easy to produce semiconductors.
Many such measures mean that there are high chances that at the consumer level even the supply would be normal by the end of 2022, regardless of chip shortage returning to normal.
How to Solve the Semiconductor Shortage?
Well, the answer, in short, is, give time.
The global semiconductor shortage is getting worse day by day, however, we don’t have a direct solution straightaway.
In 2022, the major chip manufacturers are running at close to full capacity, usually, these companies like to cap themselves at 80-90% so that the 10% time can be utilized for maintenance and quality checks. However, the extreme demand has forced them to run at full capacity.
They cannot manufacture more. And they cannot build a new factory quickly enough to solve the need of the hour. The problem is the supply isn’t just a semiconductor shortage. Of course, the Semi-Conductor shortage was the root cause, the problem is even worse in many industries.
Usually, industries guess the probable production figures, sales, and projected revenues months in advance. They plan their logistics and productions accordingly.
However as you can see, most of the companies in almost every industry underestimated the demand. Now the demand increased, but they did not manufacture sufficient in advance to satisfy the demand.
But, the big bottleneck is, that first, they do not have sufficient equipment in form of Chips to be used in their products, and second, they also cannot manufacture enough to immediately curb the demand in case they can magically get sufficient supply.
Snow Ball effect: The problem isn’t just Chip Shortage
Once the Chip Shortage ends, we might still not have all the products available on market, at reasonable pricing. Let’s do it with this example.
If an Automobile company has the projections of 200,000 sales in a month, they would ensure that they have sufficient production capacity plus a buffer of a few percent by having a production capacity of maybe 210,000 or 220,000. This buffer is enough to provide redundancy to the production for production halt, maybe there’s a worker strike 3 days in the factory, they would still meet the demand if the 3-day strike stops production. In case these companies anticipate more demand they might just use the production capacity at 100%, to produce extra supply in advance.
But this chip shortage is far different. Due to their expectation of less demand, these companies utilized their production, as it would have been really expensive to manufacture 100k extra cars, with no one to buy and no place to store them. So they underproduced, but when the demand increased in late 2020 and early 2021, they were in trouble, and now then can have a backlog of 200k, and production capacity is limited due to chip shortage.
Now in 2022, they had to increase the supply quickly to match demand, as they had no buffer. But they cannot do production, as there is a global chip shortage.
So even though the demand increased they neither have supplied nor have the buffer to meet the demand.
As it is expected to take at least 8-9 months in the best-case scenario to be able to normalize the chip shortage to some extent, it means that some companies would have to keep production halt or maybe run at significantly lower capacity for 6 quarters as a bare minimum. Let’s understand how the production would take significantly longer to normalize after the chip shortage is over:
- Assume an Automobile with a max production capacity of 220k per month and usual production of 200k.
- If it gets 40% of the needed chips currently, then their production is running at 40% of its full capacity, that is producing 80-100k cars a month.
- Now the demand is around 180k a month, so they are having an 80k supply shortage every month, for 8 months.
- They have a backlog of 80k each month for 8 months, roughly 640k in the backlog.
- Now after 8 months, the chip supply normalizes and they start getting proper supply, so they run on full production capacity (220k), and the demand for the month still is 150k.
- They still have a 640k backlog, so the extra 70k produced every month, would still need 9 months at 100% capacity to wipe the backlog.
And this means that even if the chip supply was to normalize in 2 quarters, it would take companies anywhere from 2-4 quarters after that to get sufficient products in consumers’ hands.
And that’s the big problem, the production capacity isn’t limited just at TSMC and Samsung Foundries, it is limited at every step of the supply chain and assembly line.
So, when the supply returns, the production capacity would take many months after that to normalize supply, and thus worsening the situation.
The same is the case with Graphics Cards. The RTX 3070, 3080, and 3090 were massive upgrades from previous generations.
NVIDIA had predicted higher sales than before, so they predicted higher sales, and accordingly bought higher fabrication capacity. However, it still fell short of demand.
Jensen Huang said:
“The 3080 and 3090 have a demand issue, not a supply issue. The demand issue is that, well it’s much greater than we expected. And We expected a LOT”
The same is the case with AMD’s Graphics cards. They expected big demand, but the real demand was way higher than their highest guesses.
Why are We so dependant on TSMC and Samsung Foundries?
Most of the big companies including NVIDIA, Apple, and Tesla do not manufacture their chips. These big companies, with deep pockets, rely on well-experienced companies like TSMC for quality control, and on-time production of the chips that power their products.
These companies design the chips themselves, and these custom designs, which can largely vary based on needs, are then submitted to TSMC, and they then manufacture them. The years of experience and high production capacity have served well for all major companies until recently.
So, these companies have long relations that would be hard to spoil. Automobile and consumer product companies have been really in trouble,
But what about the hardcore technology companies, why can’t they set up their production?
Well, the problem is time. Intel a known brand is entering the business of Semi-Conductor manufacturing, presumably because it can see that the demand for the Semi-Conductor is going to keep growing, and it can take advantage of the global chip shortage.
But another reason why we have a global chip shortage in 2022 is that it would take at least 2 years to set up the factory and start production.
That’s too long for any company to wait when they have an existential crisis right now.
TSMC will establish a $12 billion chip fabrication plant in Arizona. South Korea’s Samsung Electronics Co. is set to follow, with a $10 billion facility in Austin, Texas. These were planned majorly to bring geographical redundancy in manufacturing however this
The dependency on major players like TSMC had been good for decades, however, it has now brought rising concerns of global chip shortage 2022 that could wipe out potential sales worth billions due to sheer lack of supply.
Some companies like Intel, produce their semiconductors and use them in their chipsets which we commonly know as Intel core i3, i5, i7, and i9
However the majority of other companies are “Fabless”, that is they do not have their in-house fabrication.
Samsung uses its fabrications in its products, from fridges to phones, so they are somewhat happy to have this, but for other non-technology companies, it is a way too expensive affair to do their fabrication.
But why was no one able to Guess the Demand?
There’s one major reason for the inability of guessing the demand expectations.
This crisis was caused due to a pandemic, rather than a war, or a stock market crash. The pandemic did affect economies globally, but the impact was transient.
First of all, it was the first major global incident after the forthcoming internet age, the internet allowed people to keep working.
Secondly, in case of a war, chances are that infrastructure such as roads, and important production facilities, etc get destroyed. In a pandemic, the infrastructure was unaffected, which ensured, which allowed people to retain their jobs, and keep working.
Sure some industries specifically Tourism and Food had major losses, but all other sectors were functioning normally. This allowed a quicker than expected economic recovery.
Also, it’s 2022 and we are well into the internet age which fueled the need for more technology at home, the 10-year-old Laptop you had was now insufficient to even break even.
So that kept production running. Other industries even saw growth, specifically Pharmaceutical companies saw high growth in their stock prices. As an after-effect, industries directly related to pharma also ran well.
This all collectively ensured a quick economic recovery.
Even not-so-important products remained in good demand, Tesla stocks saw an 8x increment that too after the 1-to-5 split.
Companies had not expected this quick recovery and that was the major reason for the global chip shortage in 2022.
Making it clear: It’s true that the economy has not reached pre-pandemic levels, but here in 2022 the economies have recovered majorly.
The Silver Lining
Not all companies suffered.
Some companies are running untouched by the 2022 global chip shortage.
One of the big names is Toyota. Toyota is one of the largest automobile manufacturers in the world. However, it seems to have a sufficient stockpile for them to last the duration of the 2022 chip shortage.
They had been one of the leaders in teaching the world how to do production.
Records show that Toyota produces about 10 million cars a year. In 2022 they claim to have at least 1 to 4 months of necessary components to continue manufacturing.
In the 1970s it taught the world how to do JIT Production(Just In Time Production)
After the global Financial Crisis Toyota built a system called “Rescue” which was a bird’s eye view of the stockpile of 6800 parts across the production lines.
This allows them to communicate their stock status and plan supply with their supply chain every so often, and thus have the redundancy to such global supply chain issues that affected almost every other car company.
Conclusion: When will the Global Chip Crisis End?
The hint to how the problem will solve can be seen in the demand chain. It’s quite obvious by now, that there is no scope of a possible supply increase in the next few weeks. So the better option is to wait and let the demand reduce. Industrial analysts have varied explanations and expectations of when the demand would be normalizing.
Some people claim it would take at least 2 quarters, others say it would take 1 year for the demand to normalize, all we can do is hope for the best.
As we so above in the example of Automobile, there are high chances that we get control over the global chip shortage before 2022 ends easily.
However, the production backlog could potentially take anywhere from 3 months more to an entire year after that to normalize.
The graphics card that has been out of stock, are being sold on eBay and many other sites at prices way higher than MRP.
But the prices eventually have started reducing, they still are higher than MRP but way lower than what they initially were.
This shows that the demand has reduced, causing them to slightly reduce the prices.
As the demand decreases the production would start matching the demand.
There is little we can do about this whole issue.
As I said earlier, everyone has different guesses about when the chip shortage will end, but to average out the guesses it would take roughly 6 months. Even after we tackle the 2022 chip shortage, it can take us anywhere from 3 to 9 months varying from company to company to finish the backlog, and supply to get normal.