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Semiconductor squeeze - what’s the big story?

Small but powerful, semiconductors run the electronics in products from smartphones to cars, from washing machines to tablets. As demand for consumer hardware items has risen, supply chains for these microprocessors, also known as semis or chips, has become constricted. The world has realised how much it has come to depend on the humble semiconductor. We take a look at this vital component of life in the 21st century and why they are proving so hard to source.

It is perhaps one of the main unforeseen consequences of the global pandemic. As the world languished in lockdown, major customers of the world’s chip companies, such as the car manufacturers, cancelled orders in anticipation of a collapse in demand. Excess supply was quickly mopped up by makers of consumer electronics such as laptops and games consoles, the big beneficiaries of lockdown spending. But as economies reopened there was a sharp rebound in demand from all sectors.

Like a perfect storm, supply problems kicked in at exactly this point, exacerbating production difficulties for consumer goods manufacturers. Not only were the semi factories operating at full capacity, but previously well-oiled supply chains had been disrupted and global trade was seizing up. As a result, the containers used for shipping these tiny components around the world were often waiting in the wrong ports. And so the supply squeeze got tighter and tighter.

European car manufacturers were hit hard. With their suppliers on the other side of the world and the average car now requiring hundreds of semis to run everything from electronic windows to driver assistance systems, production ground to a halt. Major players such as BMW, Volkswagen and Renault sent workers home due to production stoppages. Even the mighty Apple has struggled with chip shortages. The company has resorted to diverting semis destined for its new iPad to the iPhone 13. And lead times for new products have lengthened.

So what’s next for the semiconductor? Europe and the US have launched strategic plans, aimed at reshoring both development and production. Meanwhile, complex assembly chains across several Asian economies have been disrupted by sporadic outbreaks of Covid-19. The WTO (World Trade Organisation) has warned that disruption could last for a number of months yet. In the meantime, consumer goods manufacturers are considering moving from the ‘just-in-time’ supply chain to a ‘just-in-case’ model, aiming to safeguard future production from unexpected events.