We need more chips — why world is facing semiconductor crisis & how customers are suffering

Microchip, semiconductor or processor, chips are important components in all things tech, from phones to rice cookers. But global shortage has made things difficult, and expensive.

Semiconductor chips on the production line at the Hana Microelectronics Pcl plant at the Hi-Tech Industrial Estate in Bang Pa-In, Thailand | Dario Pignatelli | Bloomberg

New Delhi: Rajesh Tuli has a problem — he can’t get enough chips to serve his clients. Tuli is the managing director of Noida-based Coral Telecom, which makes equipment used by BSNL, Airtel, the Air Force and the Army.

But Tuli is in the market for semiconductor chips, and he’s not the only one. The shortage is a global issue.

According to a Bloomberg report, waiting for new chips could last as long as 21 weeks, or around five months. Insight from US-based Susquehanna Financial Group notes that this is the “longest wait time” its analysts have witnessed since 2017, when they started tracking the industry.

This wait time is translating into customer queues across several industries, such as consumer electronics (smartphones, laptops, gaming consoles), auto industry and home appliances (microwaves, fridges), and a hike in prices as the Covid-19 pandemic makes an already stressed situation a dire one.

Among the worst hit is the auto sector. The Bloomberg report, citing consulting firm AlixPartners, said the global auto sector stands to lose about $110 billion in sales due to delays in production.

India’s largest carmaker by deliveries, Maruti Suzuki, is already working to cut production by 60 per cent at its Haryana and Gujarat plants this month due to a lack of chips.

Mukesh Ambani’s plans to revolutionise Indian telecom with a budget 4G phone from Reliance Jio have also been marred by a lack of chips.

But how did this begin and grow to become a ‘pandemic’ in the technology sector? ThePrint explains.

What is a chip?

Also known as a microchip, semiconductor, processor or integrated circuit, a chip is an impossibly small piece of silicon, usually a few hundred square millimetres — the size of a fingernail.

Chips are used to control the flow of electricity and are embedded in most things around you — rice cookers, washing machines, X-ray machines, cars, phones, laptops, LED bulbs, ATMs, trains, etc. Any electronic device that uses electricity and/or connects to the internet needs chips to operate.

The typical design of a chip consists of ‘gates’, and transistors that are connected to each other. The transistors either prevent or allow electrical current to pass through, much like how a switch operates. A gate turns the transistors on and off, allowing electrical currents to send, receive, and process input received from the device user, explains a presentation from Intel, the US-based world leader in designing and making chips.

“A single semiconductor chip has as many transistors as all of the stones in the Great Pyramid in Giza, and today there are more than 100 billion integrated circuits in daily use around the world — that’s equal to the number of stars in our corner of the Milky Way galaxy,” says the Washington DC-based Semiconductor Industry Association website.

The magnitude of chips in use is indicative of how dependent economies are on chips, and what a shortage could mean for how the world functions.

Who has been impacted by the shortage?

The shortage impacts several levels in any sector that uses chips, but the ultimate impact is felt by the customer, since manufacturers eventually pass on the cost pressure.

In India, you have probably felt the pinch already.

“Laptop prices in India have risen 2-3 per cent every month for the past 3-4 months. Select smartphone models from some brands like Samsung, Xiaomi and Realme have seen a 3-5 per cent price hike,” said Navkendar Singh, research director at IDC India.

According to News18, Xiaomi’s Redmi Note 10 has seen five price hikes since its launch in March 2021.

Coral Telecom’s Tuli said ordering and procuring a chip for more advanced processors, which used to take 45 days to three months, is now taking up to a year. “For most chips, prices have increased 15 to 20 per cent, but the more advanced chips used for memory and storage functions have gone up four times. The chip shortage is more challenging for MSME telecom players like Coral because larger companies with deeper pockets would have hedged against the shortage by being able to order much larger quantities of chips way ahead of time,” he said.

However, there’s some good news for smartphone customers. Sales in India aren’t expected to be impacted too much because the period after Diwali until February is a “lean season” with lesser customer demand, said Navkendar Singh.

“IDC does see the chip shortage woes subsiding, at least in the smartphone segment, in the next nine months,” Singh added.

What is likely to be impacted over a longer spell of time are products like laptops, personal computers and TVs, according to Singh.

This is because companies manufacturing these are facing not just a chip shortage but also a shortage of silicon, he added. Silicon is required to make the chips, the display screen and processors. “These other gadgets require greater amounts of silicon than smartphones do,” Singh said.

When it comes to the auto industry, auto expert Puneet Gupta, director at market intelligence firm IHS Markit, said the global chip shortage will impact India for the next 2- 2.5 years.

Estimating the impact on profits to be severe, Gupta said if usually India sells 3.7 million cars a year and sells 10 per cent less now, that would be a “considerable hit on the market”.

The most popular models in India are Kia’s Seltos, Hyundai’s Creta, Maruti’s Swift, Baleno, and Vitara Brezza, according to Gupta. Around 40 per cent of the components that are used in these cars are electronic and will require a chip to function. Typically, the more features a car has, the more chips are required to control them.

For instance, airbags have a sensor that sends signals through a chip. Similarly, the dashboard readings, the car engine and tyre pressure-monitoring are powered by chips.

According to TheNextWeb, a tech website, a non-electric car has between 50 and 150 semiconductors while an electric one could have up to 3,000.

As a result of the shortage, Gupta says base (car) variants with lesser number of features will be made by automakers instead of the high-end variants that come with more features, thus impacting profitability.

What caused the chip shortage?

The primary reason that impacted chip production was the Covid-19 pandemic and the lockdowns it brought about. However, other reasons have also slowed down production and delivery of these tiny electrical powerhouses.

In July 2020, a fire at a plant in Japan which makes a chip component called ABF (Ajinomoto build-up film), likely hindered chip production, a point noted in a September 2021 report by Fortune.

Then, in October 2020, a fire at a semiconductor plant belonging to sensor maker Asahi Kasei Microdevices in Japan, affected supplies. Nearly a year on, the company website continues to carry this notice: “The supply of AKM product is currently affected by the fire occurred on October 20, 2020…Please contact your local sales representative to check the status of individual products.”

Another factor adding to the crisis is a shortage of containers, the large boxes that are used to store and transport items via sea, a major mode of global shipping.

According to Singh from IDC, the current chip crisis isn’t just a shortage of the chip itself. “It is also a supply chain problem … Bottlenecks like the container shortage have made it harder to ship chips via sea, so transporting it via air adds more cost to end products.”

Logistics tech company Project44 said that with Covid restrictions easing, a “surging consumer demand” has directly resulted in a “dearth of container capacity” as well as a “unceasing congestion across the entire length of the supply chain”.

Project44 further noted how the demand in the US has played a role in this situation as “only 40 containers [are] being exported for every 100 containers being brought onto American soil”.

Matters get worse when China can’t get back its containers. “Container shortage is also highly influenced by the high quantity of imports that US (and Europe) gets from China. However, the Chinese imports from the West are not even marginally substantial. Getting the containers back to China is a major reason for … shortage,” Project44 said.

In the auto sector, the problem has taken on a different form. An “illusion of a chip shortage”, according to Gupta, has resulted in automakers ordering three to four times the requirement to avoid crunch situations.

Secondly, the sector’s requirement isn’t as advanced as the electronics sector; compared to smartphones and computers, cars work on less sophisticated chips. So chip makers might first fulfill the more complex orders since they are likely to be more profitable, said Singh.

Shift in chip-making monopoly

The US became a superpower nation powered by its tech innovations, like chips. However, in the course of the pandemic and the suspension of global supply chains, China and other Asian countries developed their chip-making capabilities. So, while the US is still the leader in researching and developing chips, Taiwan and South Korea have emerged as leaders in manufacturing.

A March 2021 note from US chip leader IBM said: “You never want to be in a spot where another nation can control a valuable resource that your nation depends on.”

This is why the US government is now looking at resolving the semiconductor supply issue by investing “at least” $50 billion in the sector.

This is also why India last year approved a scheme to financially incentivise semiconductor manufacturers and even issued an Expression of Interest to set up or expand existing semiconductor fabrication facilities.

India is at a very elementary stage in facilities for designing and manufacturing chips, a fact that is hampering the country’s ‘self-reliance’ when it comes to electronics manufacturing.

(Edited by Manasa Mohan)