You may have been hearing about the global chip shortage, but what exactly are these chips, and why are they so important? A chip, or microchip, is another name for an integrated circuit, which is a set of electronic circuits on a piece (or “chip”) of semiconductor material. Typically, the material is silicon. These chips power just about every electronic device in operation, including cars, appliances, and computers.
The chip shortage is the result, in part, of increased demand spurred by the growth of the Internet of Things (IoT). The IoT is the collection of connected devices — each of which requires a chip — and more chips are needed to build them every day. In fact, according to the Semiconductor Industry Association (SIA), “More semiconductor units were shipped during the third quarter of 2021 than during any other quarter in the market’s history.”
In this post, we explore more about what led to the chip shortage, what’s likely to happen next, and how you should respond.
Why Is There a Shortage?
As noted above, more chips have been required to build IoT devices. This demand started prior to 2020. When the pandemic began, even more chips were necessary to build the extra computers needed by workers to use in home offices and by individuals wanting more or better home entertainment options. Then, according to a recent TechRepublic article, “As 5G and cloud-based services grew, more chips were needed for communication platforms like Zoom and video streaming services.”
The problem was further exacerbated by several factors:
- Chip manufacturers have been hesitant to build new foundries. That’s understandable, given their expense and the unknown future of demand. However, some larger companies, like Intel, Texas Instruments, and Samsung do plan to expand.
- Some device developers have been hoarding chips in case they aren’t able to purchase more when they need them.
- Supply chain issues, particularly in Asia where many chip manufacturers operate, have delayed chip delivery to places like the U.S.
- Geopolitical issues involving China and Taiwan, the leading chip producer, could accelerate, making it more difficult for the U.S. to obtain needed chips.
- Weather events delayed manufacturing in places like Japan and Texas.
- Auto manufacturers canceled chip orders early in the pandemic when they assumed people would be buying fewer cars. In response, chip companies switched to producing chips for consumer products instead.
Electronics manufacturing companies are reducing production and using older components to build new electronic devices, many of which have gone up in price or are less available. The U.S. government is moving towards legislation that includes spending to increase production of and research around semiconductors. And chip makers are changing their development strategies to address the shortage.
Meanwhile, as companies become more desperate, they tend to be less careful about the quality of chips they purchase, and some end up buying counterfeit products. The TechRepublic article states, “Because parts can change hands various times, it can be difficult to trace the origins and credentials of the original seller.”
When Will It End?
No one knows for certain when the chip shortage will end, but experts, research firms, and professional organizations are taking their best guesses. The Institute of Electrical and Electronics Engineers (IEEE) expects the supply to return to normal in late 2021. Gartner has predicted it will return to normal levels by the second quarter of 2022. Forrester’s prediction for the shortage to continue into 2023 is less optimistic. And the CEO of Intel, one of the world’s largest chip manufacturers, said the problem could take several years to be resolved.
The following news report states that Tesla’s Elon Musk predicts the chip shortage will end next year:
How to Respond
If your company uses chips in your manufacturing, you may have to be creative in the coming months. In a recent press release, Gartner recommends the following steps (paraphrased):
- Extend supply chain visibility beyond the supplier to the silicon level, to project supply constraints and bottlenecks, and predict when the crisis will improve.
- Look to partner with similar businesses and approach chip foundries and/or outsourced semiconductor assembly and test (OSAT) companies as a larger entity to gain leverage.
- Track leading indicators, such as capital investments, inventory index, and semiconductor industry revenue growth projections as early indicators of conditions to stay updated and see how the industry is growing.
- Qualify a different source of chips and/or OSAT partners to help reduce risk. Additionally, create strategic relationships with distributors, resellers, and traders to help find the small volume for urgent components.
If your company doesn’t manufacture but does use products containing chips, your strategy will differ, according to the TechRepublic article. You should prioritize spending on components that would cause significant problems if they fail, consider alternatives (such as employees temporarily using their personal devices for work), and buy used or refurbished parts or devices from a different manufacturer than the one you normally use.
Your company might want to use this situation as an opportunity to require less chip-enabled equipment by moving at least some operations to the cloud. This strategy could be particularly useful if you already have a cloud deployment plan that you’ve not yet implemented. Or, if you can, simply wait until the situation improves to buy needed technology.
Concern Is Warranted
Should you be concerned about the global chip shortage? It depends on what kind of business you run, but the likely answer is yes. If you’re a manufacturer that builds products that include chips, you’ll likely need to cut production, find alternative sources, or even consider creating your own chip manufacturing operation.
If you use such products, you may need to find alternative machines or processes to operate your business. Either way, your organization’s leaders will need to continue to be patient and creative as the chip supply once again becomes sufficient to meet the demand.