The semiconductor chip shortage started after an unprecedented surge in demand for personal computing devices as people began to work and do schooling at home during the pandemic. Although the US and European governments are trying to invest in the market to balance out the supply chain, chips are likely to stay in short supply for the coming months as demand stays as high as ever.
What caused the shortage?
Semiconductors are in short supply, first due to factory closures resulting from the Covid-19 pandemic and then the heightened demand for consumer IT products as work shifted to the home. Further pressures were added to the supply chain as a series of unrelated crises occurred; a fire at a Japanese semiconductor foundry, a storm causing power outages that shut down chip factories in Texas, and construction work accidentally severing a power line at a manufacturing complex in Taiwan.
What is being done to improve supply?
While some companies design and manufacture their own chips, the cost and complexity of the process means that the sector relies on a few chip manufacturing facilities. These facilities are mainly located in Southeast Asia, with about three-quarters of all global chips coming from China, Japan, South Korea, and Taiwan. Many products are designed in the US and Europe but then manufactured in these countries.
Setting up more semiconductor production factories might seem like an answer, but the industry is not well suited to shifts in demand as the complexity of the product means it takes years and billions of dollars to set up a chip factory – and many billions more to keep it competitive.
Governments around the world have however begun to get more serious about semiconductor manufacturing. In the US, the government has been calling their reliance on foreign chip makers a ‘national security risk’. The Biden administration intends to bolster their domestic chip industry with the CHIPS for America Act, which will fund the semiconductor industry to the tune of $52 billion over five years. Over in EU, they’ve set out an ambitious plan to grow its share of the global semiconductor market by 20% by 2030. To help with this, the European Commission has committed $160 billion from its coronavirus response fund for tech investment.
What does this mean for your company?
The efforts towards more new semiconductor productions can’t be expected to make big changes to the supply until 2022 or later, so little can be done to address today’s shortage. At Horner, we find ourselves caught in the dilemma of either providing our customers with longer standard lead times, which can be as much as 68 weeks, or finding alternate part options on the market that can cost 50 times the standard price.
We have made the decision to pay the market price so that we can continue to meet our customer needs and requirements. This has the risk and liabilities of building up a lot of inventory to cover demand. While this action does involve some customer price increases, we feel that we are willing to take this risk to be sure we do not delay availability.