Is Global Semiconductor Shortage Impacting the Automotive Industry

The global automotive and tech industries are on the edge as a wave of a supply shortage of semiconductors has hit them hard and how. Computer chips manage or probably run almost everything under the sun.

From nuclear plants to the internet cables, stabilizing suspension systems, and regulating engine temperatures, we need them more than ever since technology surrounds us in a way that we are yet to comprehend.

Computer chips are almost everywhere, in the cars we drive, in the smartphones we use, in devices like refrigerators, laptops, television sets, etc. We can’t imagine our lives without these. The shortage of these chips has turned down a few economies and soared for a few others around the globe.

What are semiconductors
Scarcity of Semiconductors around the Globe
Reasons for the scarcity of semiconductors
Higher demand for semiconductors
Effects on the Indian market
What happens next
FAQ

What are semiconductors

Semiconductors or chips as we commonly know them are basic structures used for encrypting logic and memory functions in automobiles, phones, laptops, and gaming devices. Semiconductors are integrated or electronic circuits printed on conducting materials, the most common being silicon. They are the basic building blocks for making computers and running software.

Over the decades, developers have managed to squeeze more circuits into tinier circuits making our computers and devices smaller and cheaper. The semiconductor fabrication is based on several transistors, the smallest part of the chip’s electronic component, per square millimeter. The factories or facilities that produce semiconductors are known as “Fabs”.

The most advanced Fabs are known for semiconductors that measure 5 nanometers. That’s a millionth of a millimeter. Smaller the semiconductor, the higher the transistor count per square millimeter. The most highly functioning semiconductors are ones having a density of 100 transistors per square millimeter.

Scarcity of Semiconductors around the Globe

A chain reaction was set off when the pandemic hit us. As governments around the world imposed strict lockdowns, the demands for automobiles took a sharp U-turn. The automobile industry is one of the largest consumers of electronic chips as cars are turning into devices with power windows, machine control, and other features that use Artificial Intelligence. All these functions are integrated through semiconductors.

Automakers like General Motors and Ford shut down several plants due to a decline in demand and production was brought to a halt. The sales fell drastically and companies cut short on their purchases of semiconductors.

While the pandemic forced us to stay at home the need for indoor entertainment rose substantially. This resulted in an increased demand for tablets, smartphones, and laptops worldwide. The ripple effect called upon a higher demand for semiconductors in the tech industry. Tech companies began roping in more chips and some even stacked a few envisioning the shifts in the global demand.

The market recovered at a better pace than anticipated and the demand for the auto making companies started to re-surface. Meanwhile, the tech industry gorged up 70% of the semiconductors being produced and left the automakers high and dry.

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Reasons for the scarcity of semiconductors

The USA is the largest producer of semiconductors in the world. Due to reforms implied by former President Donald Trump, the USA severed ties with Chinese companies and limited the chip sales export to China. China stockpiled chips and other countries followed suit.

The American break up with Chinese companies turned the demand wave to TSMC, Taiwan Semiconductor Manufacturing Company, and other East Asian companies. TSMC and Samsung created a monopoly over the production of semiconductors which add up to 70% of the total production.

America’s semiconductor production has plummeted to 12% from 37% since 1990. Consecutive changes in political leaders and bare minimum funds have discouraged the overall production.

Other factors that catered to the scarcity were a huge fire in a Japanese chip factory in October 2020 and a cold snap that withered two semiconductor factories in Texas.

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Higher demand for semiconductors

The TSMC and other east Asian companies are working under extreme pressure to meet the demand worldwide. It might sound exuberant for the company, but it is far from what reality is.

One might wonder why can't more Fabs be built in order to sustain the demand. Fabs have peculiar prerequisites such as temperature-controlled environments, dust control, highly volatile pieces of equipment, and a minimum of five years of time to get it ready for production.

Not to mention the sky-high cost requirement for setting up a Fab. No wonder the largest producer of chips America, is far from its competitors lacking the funds and support from its government.

Reportedly, the demand has rocketed due to the requirement of semiconductors in the production of 5G smartphones. Every advancement in the electronic industry is largely based on the exploitation of semiconductors. As the world gets 5G ready, companies have massive supply demands for semiconductors.

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Effects on the Indian market

Indian automakers depend largely on imports of semiconductors. The worldwide demand, too few supplying agencies, and the waiting period have the Indian automakers worried as they import electronic requirements totaling to Rs 3000 crore every year.

“The big concern for the auto industry and Mahindra, and in fact for the world, is the semiconductor shortage. (It is) something that we’re very perplexed with, and something where the end is not clearly known as to when this fall will go away,” Pawan Goenka, MD, and CEO of Mahindra & Mahindra, said during a press conference on the company’s Q3 results, on February 5.

During Tata Motors’ press conference on its Q3 results on January 29, PB Balaji, CFO, Tata Motors, said that up until January, there has been no impact on the company due to the shortage of semiconductors. “Having said that, the risks are real and conversations are happening with all tier-1 and tier-2 suppliers and with the semiconductors industry as well to ensure that supplies continue.

From a demand perspective, we are going very fast, and that’s also adding to the pressure that we have. This is something that is being managed on a live basis, and we will ensure that we do our best to minimize the impact.”

“This is a challenge, and you need a hell of a lot of firefighting to get through,” Balaji added.

What happens next

The shortage will entail a while longer as the USA finds solutions for the production and sale of semiconductors. The world waits as new policies are put in place and the trade resumes.

Chip companies might be benefitting from the new demand drive but this locks them up in a long-term deal which brings more pressure on production.

The biggest winners are companies such as California-based Applied Materials and Lam search and Japan-based Tokyo Electron who make the highly complex and expensive manufacturing equipment required to produce semiconductors.

FAQ

Why is there a shortage of computer chips?

The pandemic resulted in an increased demand for tablets, smartphones, and laptops worldwide. The ripple effect called upon a higher demand for semiconductors in the tech industry.

Where are most semiconductors manufactured?

Taiwan, South Korea and China are the countries where most semiconductors are manufactured.

Why are semiconductors so important?

Semiconductors are an essential component of electronic devices, , computing, healthcare, military systems, and transportation. In short Semiconductors are the Brains of Modern Electronics.

Conclusion

Companies around the world believe that the demand for chips will barely slow down. The share prices of TSMC and Samsung have grown over 190% and 61% respectively over the last few years, all thanks to the shortage of chips.

The automakers falling short of chips, need to take a long hard look at their supply chain management and cost-effective pricing as many automobile companies saw a hike in their products due to this scenario.

This might exhibit as a complex problem for bigger players in the global market but the end result is inflicted upon the consumer who is forced to pay a higher cost.