By Bryan Turqui
About 1 trillion chips are made yearly, where each chip is made up of a set of electronic circuits that is laid out on a piece of silicon. These chips are at the heart of every electronic device and are the main component that help control these devices. It is crucial for any electronic device such as phones, cars, and satellites, and is used in a wide range of industries such as software, medical, and automotive industries.
However, over the past year the world has witnessed a sudden chip shortage due to a disruption in the supply-chain caused by the pandemic. At the beginning of the pandemic, major industries such as the car industry slashed their chip orders, estimating that sales would remain low and that they would not need a reserve of chips to meet any unexpected demand. However, the economy bounced back quicker than expected, which led to a sharp surge in demand and the ongoing shortage. Consequently, car makers are set lose $100 billion in revenue this year alone due to the shortage. As a result, Covid-19 played a significant role as it also changed consumer behavior. Consumers are now purchasing more personal computers, phones, and consoles, to cope with the many lockdowns as well as to enable them to work or study from home.
The shortage of microchips has already led to shortages for various products all around the world, such as the PlayStation 5. However, despite the importance and impact of this issue, this problem will not be fixed anytime soon due to the following reasons:
- Chips are indispensable
- Chip production is complex
- A supplier opportunity cost of choosing one buyer over another exists
Manufacturers are currently relying significantly more on chips, especially with the advancements in technologies such as artificial intelligence and automation. This growth also comes with a need for development of the chips, which leads to a simultaneous decrease in size and increase in efficiency. This will not only lead to an even bigger increase in demand but will also eventually lead to greater complexity in the creation of the chips.
In addition, chip manufactures are helpless and are unable to boost sales since they cannot suddenly increase production to meet the current increase in demand or ask their customers for a delay due to the importance of chips in their products. As a result, the current lead time needed to create the chips has increased 2 to 3 times more than what it would usually take.
Finally, the suppliers of the chips get to decide on who to sell the chips to and who will have to wait, eventually creating advantages for some companies, while simultaneously creating disadvantages and losses for others.
The top three chip producers are Intel (USA), Samsung (South Korea), and TSMC (Taiwan), selling a combined $185 billion worth of chips last year. Due to the low supply, these firms can decide on which industry they should prioritize, and what industry should be kept waiting, depending on their preferences. For example, Apple alone consumes almost $58 billion worth of semiconductors annually, while the whole automotive industry consumes together a total of $37 billion worth of chips annually, where Toyota and Volkswagen are the 2 largest chip-consuming car companies, utilizing $4 billion worth of chips yearly. In this case, the chip companies would rather sell to Apple, their fast-growing and largest client rather than selling to smaller companies and potentially losing Apple as a customer.
The Future and The Alternative
Due to the complexity of manufacturing chips, this supply-chain disruption will go on for the next few years. Manufactures are looking into different alternatives in order to meet their needs, further develop their chips, and boost their sales. One key alternative is using the graphene microchips rather than the standard silicone microchips. Graphene has many characteristics that make it a great fit for electronic devices, such as its superior electrical conductivity properties and its large and active surface area. There are many different forms of graphene, which provide a significant choice of properties to suit the application. These graphene sheets can be manipulated to show similar functions of silicon if desired. However, there are several unique benefits that graphene has over silicon, such as the sheet’s thinness.
Graphene has the potential to substitute silicon in electronics, but it will depend on various factors, such as the willingness of buyers to adopt graphene in their production, if they realize graphene’s long-term value propositions, such as an increase in performance. For silicon to be swapped for graphene, manufactures must also be able to supply enough high-quality graphene for electronic devices since only the high-quality is suitable.
The disruption of the supply chain caused by the pandemic will have lingering effects over the next few years. Moreover, with demand increasing each year at a rapid pace, suppliers will have to take into consideration future demand, which might also lead to greater issues, keeping in mind that on average, it takes about 2 years to setup a complex semiconductor production plant. As the disruption worsens, the prices of electronic devices will go up due to the ongoing increase in prices of chips caused by the limited supply.
Although many industries are undergoing extensive losses due to this disruption, there is still hope for these manufacturers to overcome their losses given that many leading countries such the USA and China are heavily investing in the chip industry. This should help not only in overcome the current shortage, but also in taking the lead in the race for chip supremacy, given that chips are considered the new oil nowadays. Manufactures could also overcome their issues by adopting different alternatives to traditional silicone chips, such as the aforementioned graphene chips.
The bullwhip effect:
Information gets distorted for various reasons as it travels upstream in the supply chain (from retailer to distributor, for example). This imposes tremendous costs of oversupply, stockouts, excess capacity investments, and greater risk.
Why would the bullwhip effect be a driver of the chip shortage?
When the pandemic began, the automotive industry halted all production and significantly decreased or canceled any future orders of chips due to the forecasted drop in sales.
However, the economy recovered quicker than anticipated and the release of vaccines helped overcome the pandemic. This led to a sudden unexpected increase in the demand for electronics. This increase in demand at the retailer’s end led to them ordering more than what they would actually need in order to cope with the increase and meet future needs. This in turn led to an increase in orders for the distributor who in turn increased their orders even more in order to cope with any fluctuation. This eventually led to the chip manufacturers receiving exponentially larger orders than what they would normally get and thus creating an undersupply of chips due to the exaggerated demand needed.
To put this into perspective, the following chart will provide an oversimplified example on how the bullwhip effect might have affected the automotive industry, taking into consideration that a car uses 100 chips on average.