Semiconductor Chips Fall Short
Despite increased demand for electronic items, vehicles, smartphones, and other gadgets, there is a severe scarcity of semiconductor chips, which has resulted in significant losses.
The global chip supply shortage, which began after the pandemic in 2020, has deteriorated in recent months, with major corporations in a number of industries straining to fulfill increased demand for electronic goods and components.
The global chip supply shortage, according to Goldman Sachs, has impacted at least 169 industries. With no solution in sight until at least 2022, all countries face a major challenge. This has actually begun to have an influence on large economies, such as the US.
Why the Shortage?
The global chip shortage is being exacerbated by supply chain disruptions caused by the pandemic, a rapid growth in demand for electronic goods as more people work from home, and a lack of investment in chip manufacturing capacity.
The chip shortage is likely best remembered for having impacted the car industry. The whole supply chain is concerned about chip shortages, not just automakers and other end customers. The majority of supply chains are built to be consolidated and cost-effective, yet this can make them brittle. A “bullwhip effect” can occur when there is a lack of visibility and real-time communication between supplier tiers, causing modest variations in demand to be exaggerated, resulting in large cumulative demand volatility.
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The Global Stake
Semiconductor businesses’ decisions could have a huge economic impact, both on their industry and on the economy as a whole. And there’s never been a time when the stakes have been higher. Profit margins for semiconductor companies were poor in the early 2000s, with most generating returns below the cost of capital.
However, due to expanding demand for microchips in most industries, rapid expansion in the technology sector, increased cloud usage, and continuing consolidation in many sub-segments, profitability has improved over the previous decade. As a result, the semiconductor industry’s profitability has greatly improved in comparison to other industries, and this trend is projected to continue.
The chip scarcity has now become a topic of discussion not only among companies and governments, but also among world leaders. Western countries have stated a desire to move manufacturing domestically and become more self-sufficient.
The Biden administration’s has allotted $2 trillion infrastructure program which includes $50 billion for the semiconductor industry in the United States. In April, US President Joe Biden met with the CEOs of AT&T, Dell, Ford, GM, Stellantis, Intel, Northrop Grumman, and other companies. He emphasized the importance of the US government encouraging investment in the business in order to keep ahead of the competition. The South Korean government has also pledged a $451 billion commitment to assist companies in increasing semiconductor production.
Chipping the Chip Shortage
Chipmakers are frantically trying to keep up. According to Deloitte, the world’s three major semiconductor makers had announced annual capital expenditures of more than US$60 billion for 2021, and will likely spend much more in 2022.
Aside from boosting manufacturing capacity, semiconductor companies could take a number of other actions to maintain growth and meet consumer demand. They could pursue more mergers and acquisitions (M&A) and collaborations to achieve a competitive advantage in profitable industries and grow their client base.
Semiconductor companies may also increase their investments in cutting-edge technology to aid in the development of cutting-edge chips for self-driving cars, the internet of things, artificial intelligence, and other high-growth areas. More nimble strategies, above all, may be necessary in these unpredictable times.
The Impact on Us
Due to the obvious global supply chain disruption, prices of household appliances and electronic items — from televisions to smartphones — have soared. Meanwhile, carmakers have been compelled to raise vehicle pricing due to a lack of semiconductor chips. Maruti Suzuki has increased car pricing in India due to rising production costs.
The increased input expenses could be due to a global semiconductor scarcity. Given the lack of processors, it wouldn’t be shocking if other carmakers raised their pricing as well. The worldwide chip crisis is far from finished, and prices of numerous electronic items and components may rise higher as a result.
While major chip manufacturing companies have declared plans to scale up production lines, analysts estimate that the new semiconductor chip manufacturing plants will take at least two to three years to build.
