The Global Chip Shortage 2020-2021: What Went Wrong?

Introduction:

The global chip shortage is a global crisis that is still underway as of December 2021, in which the demand for microchips at the current market price is much larger than its available supply. Therefore, the disequilibrium has resulted in shortages not only in the microchip market but in complementary markets such as the automotive and electronics markets.

Reasons for the Shortage:

There are two main reasons behind the global microchip shortage:

1. The Covid-19 Pandemic

2. Escalations in the US-China Trade War

Covid-19’s Effect on the Global Supply of Microchips:

During the Covid-19 pandemic in 2020, consumer demand for vehicles in general decreased significantly due to decreased incomes and rising unemployment rates at the time. In April 2020, vehicle sales dropped by 80% in Europe, 52% in the US, and 3% in China, compared to vehicle sales in April 2019 (Collie et.al, 2020). Since the economy was still considered in the short-run, the only way automotive firms could decrease their costs would be by decreasing their variable costs. This was done by reducing production of automobiles and decreasing their demand for resources required in production. Microchips are one of the most vital resources in the production of automobiles, therefore the decrease in production of vehicles has severely impacted the microchip industry, leading some microchip producers to decrease their operations due to the unsustainable economic conditions. While a lot of microchip manufacturers decreased their production capacities during the lockdown, some decided to reallocate their production to consumer electronics due to the mass increase in consumer demand for electronics during the worldwide lockdown, therefore significantly decreasing the production of microchips for the automotive sector.

During the fourth quarter of 2020, most countries were beginning to remove their mandated lockdowns; thus, initiating the recovery process for most economies from the recession caused by the pandemic. However, this caused a positive demand shock in the automotive and the consumer electronics industries, in which consumer demand for goods such as vehicles and electronics began to rise quickly. Producers in both industries rushed to react to the hike in demand by increasing production; but unfortunately, they were met with two unexpected obstacles:

1. The delayed response time of the semiconductor sector in accommodating the immense increase in demand for microchips.

2. The noticeable decrease in the quantity of producers in the microchip industry.

Since the supply of semiconductors was not able to keep up with the increased global demand for microchips, the price of semiconductors rose, which has increased production costs of microchips causing supply to decrease; thus, raising the price of microchips while decreasing the quantity supplied of said product. The accumulation of the price increases in both the semiconductor industry and the microchip industry has ultimately forced automotive and electronics producers to raise their prices and decrease their availability.

The US-China Trade War:

In September 2020, during the Trump administration, the United States made a bold move in the ongoing US-China Trade war by placing sanctions on China’s largest chip manufacturer, Semiconductor Manufacturing International Corporation (SMIC) (Kharpal, 2020). The US claimed that there was a huge risk in exporting US technologies to the SMIC, since it was suspected that US technologies would be then sold to and used by the Chinese military. While the SMIC stated that it has no ties to the Chinese military and does not sell their products for military-end use, the US did not back down and has forced US firms that wish to trade with the SMIC to obtain an exports license before doing so. The SMIC claims that the sanctions have resulted in large losses in revenue growth for the firm, which would mean that the SMIC is less capable of increasing their production capacity to meet the excess demand for microchips (Kharpal, 2020). Ultimately, the sanctions placed on one of the worlds largest microchip suppliers in the world (SMIC) by the US, has largely contributed to the global microchip shortage.

Conclusion:

All in all, the global chip shortage was influenced by two major unfortunately timed events:

the Covid-19 Pandemic and the continued escalation of the US-China trade war. Both events have landed microchip producers in a sticky situation in which they are unable to respond accordingly to the positive demand shock for microchips. Furthermore, the shortage of microchips has created shortages in other complementary sectors that use microchips in their production processes, such as the consumer electronics sector and the automotive sector. While the global chip shortage is still an ongoing crisis to this day, some chip manufacturers such as STMicro speculate that the market supply will meet the market demand of microchips by early 2023 (Rosemain, 2021), since the period from now till then is enough to allow for the entry of potential producers into the industry; thus, increasing the market supply of microchips.

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About The Author

Yazan Al Bishtawi

Yazan is an undergraduate student majoring in Economics and International Economics at the University of Nottingham Malaysia Campus. By becoming a research contributor in NES 2021-2022, he aims to enhance his skills in the analysis, interpretation, and synthesis of research articles in economics and politics. Yazan hopes to pursue further academic education by undertaking postgraduate studies relating to one of the sub-disciplines of economics.

References

Collie, B., Wachtmeister, A., Waas, A., Kirn, R., Krebs, K. and Quresh, H. (2020). COVID-19’s Impact on the Automotive Industry. [online] BCG Global. Available at: https://www.bcg.com/publications/2020/covid-automotive-industry-forecasting-scenarios [Accessed 13 Dec. 2021].

Kharpal, A. (2020). U.S. sanctions on chipmaker SMIC hit at the very heart of China’s tech ambitions. [online] CNBC. Available at: https://www.cnbc.com/2020/09/28/us-sanctions-against-chipmaker-smic-hit-china-tech-ambitions.html.

Rosemain, M. (2021). No end to global chip shortage before H1 2023, STMicro CEO says. Reuters. [online] 29 Jul. Available at: https://www.reuters.com/technology/stmicros-average-chip-prices-up-5-so-far-this-year-ceo-says-2021-07-29/ [Accessed 13 Dec. 2021].