Uff, not those Chips again!

Are Apple and Tesla Next?

Apple and Tesla posted some amazing results. Tesla’s revenue grew 98% year-on-year, and Apple’s grew by 36% in the April-June 2021 quarter. But, there is a threat that is looming overhead for both these companies. A threat that has already caused significant losses to the likes of Sony, Microsoft, General Motors and Volkswagen. 

What is it that binds as well as threatens them all?

Semiconductors.

Every electronic item that you have, from TVs to mobile phones, video games to laptops use small semiconductors. These are basically building blocks of the processors that give life to the machines. Your phone alone has approximately 460 billion semiconductors! It’s nearly impossible to imagine a modern-day world without semiconductors.

Over the past three decades, there has been rapid growth in this industry, which has a global market size of 452.96 billion USD. This growth is attributed to the increased power and decreasing cost of semiconductors, which was predicted by Gordon Moore, one of the founders of Intel, in 1965. 

According to him, the number of semiconductors on a chip will double every two years, and hence the cost will reduce by 50%. It was very famously stated that if the automobile industry had such improvements in the last 30 years, a Rolls Royce would just cost $40, and one could travel the Earth along the equator on one gallon of gas. 

Really impressive stuff! But this industry was in for a massive shock. The lead time for semiconductors, which is the time between placing of order and the final delivery, crossed 15 weeks for the first time in February 2021 since 2017. How did this happen?

The technological world evolves very quickly. As soon as a new technology comes into the market, the production of electronics is ramped up. You know where we are going with this, no?

Yes, you guessed it right. The demand for semiconductors also goes up in sync with the production of electronics. But, once the electronic manufacturers are done with stocking up on the latest models, the demand for semiconductors also slows down until the next technological development hits the market. You see how the demand goes up and down like a cycle?  

This cyclical demand is the root cause of the semiconductor trouble that everyone is grappling with.

Long story short: When the lock-down started, demand for computers and other electronics soared as people rushed to make their new work-from-home lives bearable. But the supply could not keep up. 

And well, no company can manufacture its machines and devices without semiconductors. So the domino effect of the semiconductor shortage touched the lives of everyone. 

But, what could go so wrong with the supplies of such a crucial element that it is not expected to get back on track till 2023?!

To understand what is causing the bottleneck, let us first understand how this industry works.

The process starts with chip designing. Companies such as Qualcomm, Nvidia, AMD, and Apple design semiconductors. But they don’t have the manufacturing capabilities. You see, setting up a plant costs up to 5-10 billion USD. So they outsource the process of manufacturing to fabrication plants. And they themselves are called fabless companies (smart, no?). 

And the fabrication plant is where the real trouble lies. Look at the distribution of revenues. What do you see?

The top four companies: TSMC, Samsung, United Microelectronics Corp, and Globalfoundries Inc, cater to 90% of the global demand. These companies then supply those chips to the fabless companies or sometimes directly to the electronics and communication and automotive companies. 

This, right here is the recipe for disaster: dependence on a handful of manufacturers. 

You can imagine what could happen if something was to go wrong in any of these places. That’s exactly what happened.

First blow: Covid-19.

Second blow: Water shortage due to low rainfall in Taiwan (where TSMC is located). And well, manufacturing semiconductors takes up a lot of water. 

Final Blow: Fire at 2 factories in Japan in July and October 2020 that manufacture specialised fiberglass required for manufacturing semiconductors.

Impact of all this?

Alix Partner, a global consulting firm, predicts that the shortage will cost the automotive industry upto $110 Billion. Ford Motor Co. and General Motors Co. predicted that the second quarter would be the worst hit as they had to keep their factories idle. Tata Motors listed a consolidated loss of Rs 7,605 crores due to the impact of lockdown, semiconductor shortage, and inflation of steel prices.

There has been a severe disruption in the electronics industry as well. Samsung stated that this supply and demand imbalance might force it to delay its flagship Note Series Models’ unveiling to 2022. 

Massive disruption. But there has to be a solution no? Why not increase the manufacturing capacity for semiconductors?

That’s what countries around the world are aiming to do. EU, that currently accounts for less than 10% of the global production, has aimed to ramp it up to 20%. Intel has come forward to invest $20 billion towards building a semiconductor factory in Europe. 

US President, Joe Biden,  has urged business leaders to make the USA the leading manufacturer of computer chips. He announced an investment of $50 billion in semiconductor manufacturing and research in the USA. 

India is also not far behind. The government has announced a cash incentive of $1 billion to every chip-maker that ‘makes in India’.  

But had it been so easy, maybe we would already have had several other manufacturing facilities, no?

High setting-up costs are there. But there are other things as well: availability of raw materials, clean water, uninterrupted electricity supply, high operating costs, and the need for frequent technology replacement. It takes years to pull this off. Not just everyone’s cup of tea you see!

Every country is trying to enter the semiconductor industry. But the shortage is going to continue until these plans are implemented properly, because the current fabrication plants are working almost at full capacity. All we can do is wait and hope.

Until then, ReadOn!

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