All is currently not “chip-shape” in the world of semiconductors

Over the past two years, the global economy has been hampered by a major shortage of semiconductor products. This has been caused by a combination of several different factors. 

t the start of 2021, Ford, Toyota and Nissan were amongst the first automotive manufacturers who were forced to slow down their production due to a lack of chips. Others soon followed, production lines fell silent and entire factories were closed at short notice. Jim Farley, CEO of Ford, described it as the “greatest supply shock” he had ever seen. However, it wasn’t just the automotive industry that was – and indeed still is – suffering from an acute shortage of semiconductors. According to US investment bank Goldman Sachs, 169 industries across the globe were affected to a greater or lesser extent: the steel industry, manufacturers of air-conditioning units, and even beer producers all suffered from the lack of semiconductor products. 

Demand outstrips supply

Whilst the Covid-19 pandemic is often cited as an obvious reason, the real causes lie deeper, explains Michael Alexander, partner at Roland Berger: “When it comes to semiconductors, the gap between supply and demand is increasing constantly.” Alongside information and communications equipment and entertainment electronics, there is also a real need for chips for consumer electronics. The renewable energy market is another sector where semiconductor products, particularly power electronics, play a crucial role. According to analyses by Roland Berger experts, the demand for chips rose by 17 per cent annually from 2020 to 2022. In contrast, production capacity only increased by six ­per cent annually in the same period. Despite this, it is clear that Covid-19 played a role, too. The lockdowns imposed across the globe during the pandemic caused demand for home office technology such as PCs and webcams to skyrocket. At the same time, the automotive industry cancelled its microchip orders on the assumption that lower demand would continue for a much longer period of time. However, when demand increased again shortly afterwards, the foundries had long since reallocated their production capacities to other industries such as IT equipment and smartphones. “The Covid-19 pandemic forced us to switch to digital solutions in all areas of our lives, increasing the demand for semiconductors. The demand in areas such as mobile communications, communication and data infrastructure, computing and home entertainment already rose sharply back in 2020,” explains BITKOM President Achim Berg. “The problem of increased demand due to Covid-19 was then made worse by overstretched supply chains. Geopolitical conflicts further compounded the situation,” comments Berg. In particular, the trade war between the USA and China – which saw Washington impose trade restrictions on China’s largest chip manufacturer (Semiconductor Manufacturing International Corporation – SMIC) – caused major disruption to the global semiconductor supply chains.

Disruptions to production 

If that wasn’t enough, Taiwan (the largest and most important player in the semiconductor industry) also suffered its worst drought for more than a century. This reduced the foundries’ output as the production process for chips requires huge volumes of ultra-pure water. What’s more, there was a fire at Renesas’ main factory in the Japanese city of Naka, causing damage to a cleanroom and seven chip production plants. According to Bloomberg, the Naka factory normally covers up to six per cent of global chip demand in the automotive industry. It is therefore clear that the chip shortage has been caused by a combination of many different factors. 

Capacities pushed to the limit

The semiconductor industry has, of course, responded to these issues, with the foundries pushing their production capacities to the limit. According to the Semiconductor Industry Association (SIA), since the first quarter of 2019 quarterly capacity utilisation at the factories has been significantly above the “normal” full capacity utilisation rate of 80 per cent, even reaching more than 95 per cent in recent quarters. Between January 2020 and January 2022, this has built up enough production capacity to produce an additional four million wafers per month – an increase of over 20 per cent. “Semiconductor vendors shipped more chips in 2021, but the OEMs’ demand was far stronger than the vendors’ production capacity,” said Masatsune Yamaji, research director at Gartner. According to the SIA, more than 1 trillion semiconductors were sold in 2021, by far the highest figure of all time. 

Building up new capacities will take years

In the long term, however, the shortage of semiconductors will only be able to be resolved by building new production facilities. For this reason, the semiconductor industry announced the construction of 39 factories in 2021, and more than a dozen of these projects are already under construction. However, it takes several years for a semiconductor factory to get up and running. “There are no signs of imminent improvement. This is because the bottleneck is caused by structural issues in the current set-up of the supply chain,” says Michael Alexander. “The shortage of chips will remain until 2023 – and probably even longer.”