Microchips are all around us. They are now being used in cars, washing machines and refrigerators, apart from their more widely known application in consumer electronics such as mobile devices and personal computers. For the past many years, the demand for chips had plateaued and supply was not too far from demand.
A demand-supply mismatch has been brewing up in the microchip industry since the last quarter of past year. The domino effects of chip shortage are presently being felt only on the supply chain level, but it can soon impact product availability. Shifts in consumer behaviour is continuously evolving and in a world where people are scaling down some expenditures, technology companies do not want to miss out on the gold rush in their industry.
Microchips are the brains behind our devices. More computational power has direct correlation with the speed on chips. By some estimates, tech industry generates $5 trillion a year. Whether it is hardware or software, chips are an integral part of the tech ecosystem. At the moment, the chip manufacturing is heavily concentrated in a few countries, among them Taiwan is the undisputed leader. Industry experts assert that a microchip wafer takes three to five months’ time in the production cycle.
Is Chip the New Oil?
The oil consuming nations outnumber the select few cartelized producers. The same analogy holds good for chips as well, but thankfully these chip producers do not behave like a cartel. Demand and supply are still the primary factors for allocation of resources in the sand to silicon industry. Some of the demand for microchips was one-off, though digitization has been adopted in many industries ahead of schedule due to the pandemic.
After a dismal 2019, the personal computing industry witnessed an unprecedented and unexpected rise in sales in 2020. Desktop computers and laptops saw sales rise by 16 per cent and 35 per cent, respectively. Gaming consoles and smart televisions were also a craze among consumers who were forced to stay indoors more than they would have liked or wanted. Incidentally, all of these devices owe their existence to microchips. India has announced to provide financial assistance to companies setting up manufacturing units to reduce dependence on imports.
Automobile Industries’ Woes
Automobile companies across the world are being forced to scale down production due to shortage of microchips. The effect of this strain can now be felt by aluminium manufacturers and other auto ancillary units. If lesser vehicles get produced, the demand for metal from auto industry will automatically plummet.
The Grim Estimate Club
Intel, Nvidia and Taiwan Semiconductor Manufacturing Company (TSMC) are the most prominent names in the microchip industry. Executives from all these corporations have given a grim estimate about the supply of chips in the coming years. The misery is expected to continue for the whole of this year and better part of next year.
What Caused the Chip Shortage?
Since the time of trade tensions between the United States and China, the industrial world has been witnessing hoarding of resources. Major companies have been anxious about the sanctions and embargos these two economic superpowers may impose on each other. Those who have either started in-house chip manufacturing or are on long-term supply agreements, are somewhat shielded from the ripple effects of surge in demand and fall in supply of microchips.
The auto industry is in the most peculiar situation. Chips which are meant for consumer electronics cannot be interchanged with those used in cars and other automobiles. Automobile companies are cash flow oriented and operate with just-in-time inventory. They cancelled orders for microchips after sales froze due to the lockdowns last year. Some of the staff at auto manufacturers were even furloughed. On the other hand, productivity and entertainment devices registered bumper sales. In order to recover their losses from cancelled orders, chip makers diverted surplus capacity to personal devices like mobile handsets, laptops, tablet computers and gaming consoles.
Auto sales recovered faster than expected and production required upward adjustment to meet the surge in demand. By now chip manufacturers were operating at peak capacity and had a jam-packed order book. All of a sudden, auto makers were out of favour and it sparked the conflict for resources. Other industries were more resilient, but the auto industry took a bigger hit as compared to the financial crises of 2008.
Modern medical equipment are highly sophisticated and automation has become a part of the healthcare industry. During the last year or so, global health infrastructure has been brought down to its knees by the Covid-19 virus. There were already other ailments and procedures that forced hospitals to operate at peak capacity and for some people it was not possible to get reliable and credible care.
Opportunity in Adversity
What makes the world feel it has self-sufficiency and reliability? In all the essential aspects we struggle to deliver in the time of crises. The pandemic is a once-in-a-century opportunity to get our world in shape for future man-made and natural calamities.