The trending topic in the media over the last few months has been the ‘global semi- conductor shortage’ but what exactly is a semi-conductor, why is this a topic that seems to garner attention and ultimately what does a shortage of these products mean for global markets?

What is a semi-conductor
– a semiconductor is a material product, usually comprised of silicon and is commonly referred to as a ‘chip’ and is an essential component for numerous electronic devices. These chips are used in literally thousands of electronic products and have countless other applications – cars, smartphones, computers and even washing machines all use them and often devices will contain multiple (often thousands of) semiconductors. To further hammer this point home, roughly a trillion semiconductors are produced annually.

Over time, developments in this industry have led to these chips becoming increasing faster and smaller as technology advances and to illustrate this, the average semiconductor is 7 nanometres (or 7 billionths of a meter) in size and yet has roughly 2.4 million transistors within this tiny space. But let’s not get too technical, to put it simply, in the digital age these are a critical part of our daily lives in terms of the products we use and is one of the cornerstones on which the digital economy relies.

Why is there a shortage
– So, to get back to my original point, it’s been widely publicised in the media that there is a global shortage of these chips but why is that? The most obvious response is that the global pandemic and associated lockdowns hampered or otherwise interfered with chip manufacturers operations and led to decreased levels of output. Many of the global producers of chips (and there aren’t very many but more on this later) did shutter operations during the various lockdowns, most notably Taiwan Semiconductor Manufacturing Company (TSMC) which accounts for 54% of global market share. The chart below shows the market share in semiconductor manufacturing globally (with companies listed on the outer ring and their countries listed on the inner ring) and it’s easy to see why a severe lockdown in Taiwan could have serious ramifications for global supply.

However, it’s a bit more complex than simply saying ‘the factories were offline for X amount of time and therefore haven’t produced as many chips this year’. Lockdowns and the associated pauses in manufacturing were the major factor but this may have just been the straw that broke the camel’s back. Other factors that played a part in the shortage is increased demand due to the large scale roll-out of 5G telecommunications networks globally, the increased demand for chip intensive electronic devices (laptops, tablet, webcams,etc) to enable employees to work from home during the pandemic, large scale stockpiling of chips by various tech firms, a crippling winter in Texas that temporarily shut down semiconductor production and a fire at a semiconductor plant in Japan during the early days of the pandemic to name but a few. On top of these myriad of issues is the logistical costs of shipping goods globally where prices have increased ten-fold from pre-pandemic levels, further complicating matters.

How long it takes to build the factories & how many there are globally
– As I’ve outlined above, supply is constrained and demand has increased so surely the simple and practical solution is to build more factories and ramp up production? This is of course true but the major obstacle in this regard is that it is extremely expensive to build these facilities, requires highly trained staff and takes a significant amount of time to build and start producing chips. These high barriers to entry dissuade many from investing in this industry and the incumbent large global chip producers are racing to increase production to meet demand. We are, after all, living in an ever more technologically advanced and interconnected world (a tech boom if you will) and unfortunately, supply has not been able to keep up with demand whether through poor planning, sheer bad luck or a bit of both. Interestingly, the US’s proposed massive $2 trillion infrastructure bill places a heavy emphasis on increasing the US’s production of semiconductors as the US only manufactures around 12% of global supply currently while Asia broadly produces roughly 75% of global supply.

What industries rely on semi conductors
– To illustrate the extent of the industries affected by the global shortage, a survey of Japanese listed companies revealed that the most affected industry was manufacturing, specifically automobile related sectors. Many automobile manufacturers (including Ford, Volkswagen and Mercedes-Benz) have had to adjust or delay production leading to delays in new vehicle orders or the ability to only order ‘standard’ vehicle models with very limited additional features. This obviously has numerous knock-on effects on all related industries.

Conclusion: Unfortunately, it doesn’t appear that this shortage is expected to come to an end any time soon. Intel, Ford and a number of other major players in this space say that they expect the shortage in supply could extend through to 2024 but noted that it’s difficult to pinpoint exactly when supply will step up enough to meet demand but it’s not anticipated to abate in the next eighteen months. For now, it seems the shortage is here to stay so you may have to wait a few more months before you can order that new smart toaster with the fancy touchscreen.