Semiconductor (or silicon) chips are the unsung heroes of the modern, technology-driven world. Comprising of an electric circuit consisting of myriad linked components like transistors and wiring formed on a semiconductor wafer, the use of these chips today covers and entire ecosystem ranging from computers and cars to cloth dryers and toothbrushes.
In recent years, the silicon chips have driven the emergence of several breakthrough innovations, including artificial intelligence and machine learning, in the process, transforming how we live and work.
Figure 1: Use of Semiconductors
However, to unleash the true potential of the digital revolution and transitioning to a smart product-driven economy, we would require even more advanced and innovative chips, offering greater computing power and larger memory capacities.
Silicon Design and Silicon Foundry When we talk about semiconductor chip manufacturing, it is essential to differentiate between ‘silicon design’ and ‘silicon foundry’ to understand the underlying reasons behind the current worldwide shortage.Silicon design is a worldwide activity involving the creation and implementation of new features in the ‘systems on a chip’ (SOC) and focuses on the end-users of the finished products equipped with the chips. Most of the design work involved here continues to take place in the US and other developed nations.
Figure 2: The Chip Manufacturing Process
On the other hand, silicon foundry consists of activities undertaken in the actual manufacturing of the chips, making it a much more geographically-centered activity, and involving significantly larger amounts of capital investments. Since the early 2010’s, most of the investments around the silicon foundries have been located in Taiwan and mainland China. As a result, almost 80% of the global production of semiconductor chips is based in East Asia to leverage existing cost efficiencies.
100% of all advanced semiconductor fabrication foundries (10nm lithography or smaller) are concentrated in South Korea and Taiwan, with the latter (through the Taiwan Semiconductor Manufacturing Company, or TSMC) accounting for 92% of all semiconductor chips powering everything from NVIDIA graphics cards and AMD processors to SoCs found in all iOS and Android devices
The Present Global Chip Shortage
Since 2018, rising tensions in the East Asian region, stemming mainly from the Sino-US trade wars and the simmering tensions over Taiwan have been pointing to potential supply chain disturbances in the near future. While the manufacturers located in these territories continued to support global demand during the period, growing uncertainties halted new investment plans in the tracks. And then, around November 2019, the COVID-19 pandemic struck.
As a health and safety measure, a large number of nations adopted strict lockdown measures, which continued through most of 2020, and sporadically in 2021. The resultant factory shutdowns halted chip production, and since this was an industry that did not operate with large inventories, the ripple effect multiplied across the verticals that depended on the timely supply of semiconductor chips for their products.
Again, the pandemic induced lockdowns resulted in a worldwide transition of office-based work models to work from home paradigms. This led to a sharp uptick in the demand for laptops and other computer goods, besides driving up the requirement for an enhanced and reliable network coverage support. With the sudden rise in the demand for electronics, and the parallel fall in supply, the global chip shortage became a crisis of the first order.
The looming transition of automotive manufacturers from internal combustion driven vehicles to connected and electric alternates was yet another factor that led to the situation snowballing out of control. Auto OEMs were forced to either postpone or halt their production plans in the aftermath of the chip shortages. Their plight was further increased by the black swan event responses in the post-pandemic world, where the demand for cars and electronics did not fall as anticipated, but actually accelerated to never-before heights.
