Probably many of my readers have heard about the semiconductor crisis, but I believe few have understood in detail this issue and the consequences that this crisis may bring.
Let's start, as they say, at the beginning...
The semiconductor crisis occurred for a variety of reasons:
♦ COVID-19.
The main reason was the pandemic, which shut down all production, collapsed component/commodity supply chains, and shut down distribution points. All of this led to a huge buildup and increased demand for computing equipment, consumer electronics, medical equipment, and more.
♦ Industry Concentration.
It's a bottleneck. Approximately 90% of the semiconductor supply is concentrated in Asia, with Taiwan alone accounting for about 54%. Meanwhile, half of the demand, according to SIA, is in the U.S.
♦ Climatic conditions.
There are a lot of complexities and nuances in the semiconductor manufacturing process: production is strongly influenced by climate, the availability of the right amount of water for cooling, and more. The weather in 2020-2021 was extremely "lucky."
- Fire in late October 2020 at the Asahi Kasei Microsystems (AKM) audio chip factory .
- A March 19, 2021 fire at a Renesas Electronics plant affected chip production for the automotive industry.
- In May 2021, Taiwan experienced its worst drought in 56 years due to record low rainfall in April-May 2021. As a result, the water reservoirs of TSMC factories (the world's largest chipmaker) were only 11-23% full in May.
- Taiwan received heavy rains throughout June 2021, threatening flooding.
- In Texas in February 2021 there were heavy snowfalls, which led to rolling blackouts, including at Samsung plants in Austin and the two factories of the Dutch NXP.
- Just as much pressure had a sharp increase in interest in mining cryptocurrencies, which requires a large number of high-performance processors and graphics cards.
More than 169 industries have been affected by the global shortage of semiconductors, such as: agriculture, automotive, electrical appliances, telecommunications and medicine (since many devices and equipment are based on modern digital technology), semiconductor chips are also needed for the Internet, passive infrastructure, IoT sensors, routers, wireless communications and many other industries.
The semiconductor crisis hit all aspects of the global economy. The automotive and medical industries suffered some of the most damage, and we'll look at the reasons for that in more detail:
The shortage of chips has prompted automakers around the world to cut car production and increase the price of cars, which has doubly hit the end consumer, as there is less supply and the price has gone up. Many major automakers, such as Ford, have had to stockpile hundreds of thousands of new cars with just a shortage of chips, hitting all supply lines hard.
The chip shortage collapsed car sales in Russia by 17% and led to significant price increases.
General Motors reported that U.S. auto sales have fallen more than 43% since the start of the 2020 crisis, as the chip shortage has interrupted production and reduced available inventory at dealerships.
Major companies in the industry, such as Ford, Volkswagen and Daimler, have been forced to suspend production at various locations and reduce their production targets because of the chip shortage.
Maruti Suzuki, India's largest car manufacturer, cut production by 60% in September 2021 due to a shortage of semiconductors.
Analysts of The Boston Consulting Group (BCG) forecast that the global shortage of components will reduce the production of cars by 7-9 million units per year. Naturally, this problem will provoke the appearance of others, so as a result we got a domino effect with layering of various factors from different industries.
Secondly, the deficit has affected the medical industry. The fact is that medicine is also actively digitalizing. In many cases, the same ventilators are sophisticated devices with the latest chips.
Well, since the volume of production of such equipment due to the pandemic has increased enormously, the need for chips on the medical side has also increased. Tomographs, ultrasound diagnostics, ventilators, infusion machines, and many other modern medical gadgets are now produced based on relatively complex electronic components. Of course, there are no powerful video chips or processors, but the shortage has now spread even to the simplest semiconductor components. It has gotten to the point where medical device manufacturers are modifying past models rather than developing new ones.
The situation with semiconductors right now can hardly be called positive. In a year and a half, the global situation has certainly stabilized a bit, but the shortage remains to this day, and high-tech chips continue to rise in price. So, electronics manufacturers, including automotive and medical suppliers, will have to try hard to get the necessary quantities of chips, which rose in price by several tens of percent.
At the moment, demand for integrated circuits exceeds supply by more than 15-20% and this is not the ceiling. At the current rate of demand growth of about 17% per year, the supply increases by only 6% during the same time, it is easy to understand the serious difficulties experienced by the manufacturing companies where these chips are used.
At the same time, semiconductor component suppliers cannot produce more than they are able to do now purely physically - about 97% of capacities of major manufacturers are loaded.
According to TSMC, the growth of chip prices is not without intermediary companies, which resell chips from the factory to their consumers at a much higher price. Particularly active players in the automotive market, but it seems to have been noticed a mark-up by intermediaries in other industries. It is worth recalling that this is the version of semiconductor component suppliers. It is not so easy to check it, because in many cases, the logistics chain is closed to the public.
The problem is that the process of chip production and supply is fine-tuned, but there is not even one, but several "bottle necks" in it. Negative factors affecting the industry overlap, resulting in the current situation - an extreme shortage of components.
In addition to climate problems, resource shortages and huge component price increases, there is another problem - the complexity and high cost of chip production. One of the main links in the chain of silicon chip production is crystal creation by Jan Czochralski's method, the so-called CZ process. Semiconductor crystal blanks are gradually pulled, which happens very slowly until the crystal reaches the desired size. Then it is cut into blanks of the desired size, a number of processes are applied, after which the finished wafers are cut into blanks for the chips. Their assembly is the last step in the chain.
Growing crystals is only possible with the necessary production infrastructure, which is extremely complex. Chip makers even joke that creating semiconductor components is much more complicated than preparing a rocket to fly into space with the subsequent launch. If it had been possible to simplify the process of preparing a blank crystal, most likely, the deficit would have been defeated relatively quickly.
Well, as it is, chip makers who plan to increase production have to wait for more than a year to prepare the necessary infrastructure. In addition to technology, facilities must be very clean - we can say that the conditions of chip production must be strictly sterile in terms of the presence of dust and other extraneous components in the air. This cannot be built quickly from scratch, it is an extremely long and complicated process. It takes two to three years for one plant, so under the current market conditions, the end of the semiconductor deficit should not be expected before 2024-2025.
Logistics has also made its adjustments, as the crisis of semiconductors was accompanied by a parallel crisis in the transportation industry. Both air and sea transportation became much more expensive. It seems that this factor should have increased the prices of the final products and cooled demand, reducing the amount of goods produced and reducing shortages. But the lead time for shipping goods by sea, due to lockdowns and restrictions, increased from a couple of weeks to several months, which completely negated this factor.
There is also a problem with increasing chip production volumes. The fact is that if the demand for them falls, for any of the dozens of reasons for which it has happened before, there will be a problem of overproduction.
Right now, TSMC, Intel, Samsung and other component suppliers are trying to accelerate as much as possible. If demand drops drastically, overproduction will be just gigantic. And this means a sharp drop in prices and a crisis already in the chip industry.
In 2022, the situation will most likely be similar to 2021, if not worse. For example, specialists from JPMorgan believe that the market will not begin to recover until 2023. But there are experts, such as Daimler, who believe that the problems will continue next year.
It's also worth remembering that the crisis of semiconductors first of all affects the global economy, as many manufacturers reduce the volume of production, reduce production, which means the layoff of staff. All these aspects to a rather significant extent reduce the taxes paid by manufacturing companies to their countries, and with the current economic crisis, the reduction of income for each country is extremely unpleasant. Because of the current political and economic situation, the costs of countries have increased significantly, incomes continue to decrease, and the general contentment of people is falling.
Thank you for your attention and see you in the new article!
Peace and prosperity to you, friends!
Always yours C.J.