If you’ve tried to buy a new computer or video game system in the past year, you’ve most likely come across out-of-stock notices or listings on eBay for more than double the retail price. As the COVID-19 pandemic hit in early 2020, consumers faced product shortages in everything from toilet paper and hand sanitizer to the Nintendo Switch. But as the economy slowly reopens in 2021, we still have to deal with another challenge: the continued global shortage of computer chips.
Why Are Computer Chips So Important?
Computer chips, or semiconductors, operate as the “brain” of any electronic device in the world. They are the most critical and expensive component in computers, and although they have existed for over fifty years, we have managed to manufacture smaller and more powerful chips to make computers faster and cheaper.
Computer chips are found in every machine we use today, from cars to water treatment plants and internet cables. Nearly anything that plugs into a wall has at least one chip that acts as a tiny computer to make the device work.
But the tiny size and complex design of computer chips require specific manufacturing conditions. Chips are produced in fabrication plants, usually called “fabs,” with highly controlled environments to minimize dust, temperature spikes, and even static electricity, all of which can damage the internal components of computer chips. These fabs cost billions of dollars to build and can take up to two years before they are fully operational, so our supply chain is highly dependent on the chip manufacturers running today.
What Is the Global Chip Shortage?
While the chip shortage is a simple equation of supply and demand, it has global implications for pretty much every sector. In early 2020, major buyers of chips, like auto companies and consumer electronics manufacturers, bought fewer chips in anticipation of decreased demand as people lost their jobs and had to spend less on nonessential items.
What many economists failed to predict, however, is that as more people spent time at home, the demand for consumer electronics, like TVs and video game systems, would skyrocket. To meet this dramatic increase in demand, electronics companies bought up all the extra chips in the market. Combined with uncertainties about consumer spending, chip manufacturers were challenged to match their production capacity with demand, leading to an unprecedented global shortage in computer chips.
What Caused the Chip Shortage?
While unanticipated changes caused by COVID-19 affected the supply and demand of computer chips in 2020, we are still seeing these effects impact multiple industries today. Other industry bottlenecks have caused the chip shortage to continue well into 2021. Although major tech corporations like Qualcomm and Apple have designed the advanced chips we see in the newest cars and consumer electronics, they do not produce the chips themselves. Instead, they rely on advanced factories called foundries to produce their designs.
Just three or four foundries control the majority of global chip fabrication, and about 91 percent of contract chip manufacturing happens in Asia alone. With global chip manufacturing in the hands of so few players, production delays added up quickly last year as manufacturers struggled to overcome pandemic-related challenges, such as decreased production capacity, fewer workers, and delayed shipping times.
The global chip shortage isn’t only because of the pandemic. With the rise of 5G, many manufacturers are increasing the production of 5G-enabled devices, which need a lot more computer chips than the typical smart device. The transition to the newer generation of telecommunications and cellular data has put a huge strain on chip production that would have happened even without the coronavirus.
What’s Happening with the Chip Shortage Now?
As the global chip shortage continues, we are seeing lead times (how long it takes to fill an order for a chip once it’s been placed) estimated to be over twenty weeks, compared to the twelve-week lead time in February 2020 before COVID-19 became a global pandemic.
In early 2020, many auto manufacturers underestimated the demand for new cars, expecting that fewer consumers would be driving to work as they transitioned to working from home under government stay-at-home mandates. This has led many carmakers to halt production in 2021 as the chip shortage caught up with them.
To regain control of chip production from overseas manufacturers, Intel recently announced a plan to create a foundry business. While Intel currently designs and manufactures its own chips, this foundry would allow them to produce chips for other companies as well, making it easier for companies in the United States, Europe, and other regions to acquire the chips they need for their own production.
How Does the Chip Shortage Affect Consumers and Businesses?
Consumers are bearing the brunt of the global chip shortage; because computer chips are both essential to consumer electronics and in low supply for manufacturers, consumers are seeing the prices of already-costly electronics increasing rapidly if they can even buy them at all. Many video game consoles, like Sony’s PlayStation 5 and the new Xbox Series X from Microsoft, are completely sold out at official retailers and are only available for highly marked-up prices on eBay and other third-party sellers.
Even Apple, which spends $58 billion per year as the world’s biggest buyer of computer chips, had to delay the long-awaited release of the new iPhone 12 by two months in 2020 because of the chip shortage. Samsung, despite being the world’s second-largest producer of chips, recently announced it might have to postpone the launch of its upcoming high-end smartphone due to the shortage.
As cars have become smarter, offering advanced features such as blind-spot detection and self-parking, computer chips make up around 40 percent of a car’s manufacturing cost as of 2020. Without a reliable supply of chips, auto companies are expected to lose around $61 billion in sales in 2021. Today, millions of cars are sitting in factory lots, almost complete minus the computer chips they need to function.
With the global auto industry buying around $37 billion in chips each year, they spend far less than other major players in the chip industry, making them a lower priority to chip manufacturers that have to prioritize their orders. After reducing chip orders in response to declining vehicle sales in 2020, car manufacturers find themselves in the back of the line today as they try to reorder chips to keep up with the increase in consumer demand for new cars this year.
Ford Motor Company reduced its full-year forecast due to the computer chip shortage and now sees it extending to 2022. Two of the largest RFID chip manufacturers have lead times of twenty weeks or more as compared to six to eight weeks in the past.
As economic activity picks back up throughout 2021, we can expect to see the chip shortage continue. Although companies like Intel and other existing chip manufacturers are planning to build new fabs, it can take months, if not years, for these fabs to get online and be fully operational.