When is the Chip Shortage Ending? Not Anytime Soon
From refrigerators to video game consoles, products that require microchips are difficult or impossible to find. While the COVID-19 pandemic has strained supply chains across nearly all industries, microchips, in particular, have been in especially short supply. Although experts agree that the situation will eventually improve, the near- and medium-term status of microchip manufacturing remains troubled. Here is how the chip shortage is affecting broad swaths of the economy and why the manufacturing strain is expected to persist.
Limited Manufacturing Capabilities
Despite how ubiquitous microchips and other digital devices are in day-to-day life, chip manufacturing is largely the domain of a small number of companies. Some companies that sell products manufactured in-house, including Intel, Broadcom, and Qualcomm, have their own chip foundries. Other foundries, most notably Taiwan Semiconductor Manufacturing Company, handle chip manufacturing duties for most other companies.
Even though Apple and Google have been making headlines for creating chips specifically for their devices, they must rely on limited third-party chip foundries to create their chips. Over the course of the pandemic and the shutdown, it’s become clear that manufacturing capacity is too limited considering global demand for digital products, a problem that won’t be resolved for some time.
COVID-19 and Demand Predictions
In the early days of the pandemic, many experts projected a drop in demand for certain types of chips—a prediction that was largely incorrect. As orders for chips were canceled or scaled back, consumers and companies continued placing orders for products. These inaccurate predictions are perhaps most acutely seen in the automotive industry; while experts projected less demand for new cars, individuals and companies kept placing orders, leading many automobile manufacturers to face more orders than they could handle, with sensors and other digital components serving as the primary limiting factor.
Other fields were projected to see an increase in demand, and these predictions largely held true. Laptops, in particular, saw a significant increase in demand as more people worked and entertained themselves at home. Laptops aren’t as difficult to find as other devices, but consumers are seeing more limited options than is typical. Although some forecasts show laptop demand dipping, the new hardware requirements of Windows 11 might lead to a surge in demand.
Perhaps the biggest factor in the chip shortage today is pent-up demand. Demand for the Sony PlayStation 5, for example, won’t fade just because would-be buyers can’t find a console; their demand will persist. Similarly, those who avoided purchasing graphics cards due to extremely limited stock and scalper pricing on the secondary market are waiting for prices to drop below what they consider a reasonable threshold, but their demand remains the same.
Likewise, many people have held off on purchasing new home appliances due to stock shortages. However, those looking for a new microwave, refrigerator, or other appliance still want a replacement, and their consistent demand is placing strain on chipmakers. Even when the problems leading to the shortage have been mitigated, the shortage itself is likely to persist as long as the pent-up backlog remains in place.
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More Manufacturing Capacity
The ongoing global chip shortage has led many to question if too many companies and nations were too reliant on chip foundries in Taiwan and a handful of other nations. In fact, many nations, including the United States, have committed to exploring the opening of new semiconductor facilities to help provide better transparency in the market and to be able to meet unexpected increases in demand.
However, there are substantial barriers. Foundries typically cost between $10 and $20 billion to build, and margins for manufacturing chips can be fairly low, making the investment one that companies are often reluctant to make. Furthermore, time is a limiting factor, as it typically takes around five years to build a plant, meaning a surge in investment won’t have an impact on shortages for a significant amount of time.
Even when the chip shortage begins to become less acute, there are still ongoing problems with how chips are manufactured today. Today’s chips are able to do more in a smaller amount of space, but they’ve also become more specialized. General-purpose chips are still in common use, but tech giants often demand more specialized manufacturing to create chips designed for a single device, which can leave foundries producing less than their capabilities to sell a smaller number of relatively high-margin chips.
In addition, tried-and-true chip designs are still in high demand. An automobile sensor that relies on older technology, for example, may still be in high demand if it performs its job well. This leads to foundries keeping older manufacturing processes intact instead of investing wholly into new technologies. As newer manufacturing processes come into higher demand, it can take a considerable amount of time for foundries to catch up.
When Will the Shortage End?
Experts have slightly different views of when the chip shortage will end, but there’s a strong consensus that it will stretch into 2022 at least. Some are projecting a full two years of shortages, while others believe it may end at some point in 2022. Although the pandemic isn’t the sole cause of the chip shortage, it was clearly a major factor, and uncertainty surrounding the future of the novel coronavirus means that all projections must come with the caveat that unforeseen pandemic developments could lead to a lengthier shortage than even some of the more pessimistic projections forecast.
Still, supply and demand, particularly in an industry as lucrative and important as tech, means that market forces will eventually lead to some correction. However, such corrections can take years to put in place, and some ongoing problems don’t have clear solutions. Elements of the current shortage may represent a new normal for tech.
From automakers trying to keep up with demand to gamers just looking to upgrade an outdated graphics card, individuals and organizations are being profoundly affected by the microchip shortage. While the end isn’t clearly in sight yet, there are signs that the situation is improving. Precisely how long it takes is yet to be determined, but the experts are in full agreement: Be patient.