Over the past couple of years, you may have seen on the news mentions of a global chip (semi-conductor) shortage. This shortage has had knock on effects on a variety of industries. Research by Goldman Sachs suggests that 169 industries have been impacted by this shortage, and consumers have faced long waiting times and higher prices on products which use semiconductors.
It is not easy to pin the cause of the shortage down to one factor. Of course, the coronavirus pandemic is one of, if not the main reason for the shortage. A combination of lowered production due to chip production facilities shutting down and the selling of inventory stocks of chips to meet demand had lowered the supply of chips in the market. Pairing this with an increased demand of computers and electronic devices which was caused by the massive increase in remote working/learning makes it easy to see how this has become a problem. The global chip shortage was further exacerbated by covid-related supply chain issues.
The other major factor would be the economic conflict between the US and China starting in late 2020. Before the crisis, China was by far the largest exporter of semiconductor devices, and home to accounting for 34.2% of global exports. The US imposed sanctions on SMIC, the largest manufacturer of semiconductors in mainland China, meaning many US based companies that relied on semiconductors from SMIC had to source their components from other firms such as TSMC (the largest semiconductor manufacturer in the world); however, many of these firms were already producing at maximum capacity.
The industries which took the biggest hit are the automotive and consumer electronics, appliance, and LED industries. Computers and other devices such as game consoles require multiple semiconductors in them, especially in the graphics cards. Modern cars require over a thousand semiconductors in them, and cars with more advanced technology can require 3000 chips in one vehicle alone. It comes to no surprise that this shortage has slowed the production of cars globally. Ford has had to suspend output at some of its manufacturing plants and reduce output at others. Last month, Toyota, the largest car manufacturer in the world, announced it expects to fall short on its annual production target of 9 million vehicles due to the shortage of semiconductor chips.
But what does this mean for consumers? As with many adverse shocks to any industry, increased prices and in this case longer wait times from products. A good example is the PS5. Unlike many previous iterations of the PlayStation, the PS5 has not reduced in price with age. It released in 2020, yet in 2022 sells for well above its RRP, and low stocks and supply chain issues mean many people are buying and reselling the console. A similar pattern can be seen in the car market, with delays on orders of new cars, and less new cars being sold allows for dealerships to increase their mark-up on new vehicles raising the price consumers must pay. As there is excess demand for cars, people opt for second hand cars, and the second hand car market has adjusted its prices accordingly.
There is a lot of uncertainty around when the chip shortage will end, and covid-19 being one of the major causes doesn’t help when it comes to forecasting an end to the shortage. The EU and US have made moves to address the issue, with the proposal of the ‘European Chips Act’ which aims to increase the manufacturing and innovation in semiconductors in the EU, making the EU less reliant on importing chips and more resilient in the case of another chip crisis. The Biden administration has proposed the ‘Innovation and Competition Act’ in response to the shortage, providing roughly $52bn to support the US’ semiconductor industry, aiding in manufacturing, R&D, and supply chain security.
Hopefully in the near future there will be an end in sight for the shortage, but for now we have to put up with it, and that first car or PS5 you had your eyes on will likely cost more than you had in mind.
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