What is the Chip Shortage?

Cars, phones, and anything that uses processing power needs a computer chip. Before the pandemic, chip usage and supply was in balance and thus running smoothly. However, little did we know that the supply chain of semiconductor chips was so fragile. When the pandemic hit the world, it disrupted the careful balance of the computer chip industry. Since many companies rely on computer chips as a part of their business, their flow of operations were disrupted as well. This event has led into what is now being called “The Chip Shortage”. 

What has led to the chip shortage being so dire is that there is too much demand and the chips can’t be made fast enough. This situation occurred because companies believed the demand for their products would decrease during the pandemic, so they ordered less chips. This then led chip manufacturers to adjust their foundries and supply-chains accordingly. Supply chains can only move so fast to adjust to quickly changing demand. So when the world began to reopen earlier than expected, demand for chips exceeded the supply severely.

Can’t More Chips Be Made?

Chip manufacturing is complex, expensive, and time consuming. These factors make it difficult for manufacturers to rapidly produce chips at the snap of their fingers. Although, they likely wish they could because the unprecedented demand for chips is a large monetary opportunity for them. To make matters worse, most companies can’t ask another manufacturer for chips since their products require specific chips. Not to mention, a large majority of the world’s chips are made by a handful of manufacturers. Thus, chip manufacturers get swamped with orders but their chip foundries can only produce so many chips.

I’ll give an example to clarify. Say Apple wants 100 chips for their iphones from Intel in 1 week. Apple calls Intel and asks for the chips. Intel says they can do it but it is going to take 10 weeks since Microsoft, Ford, and other retailers’ orders are being processed. Now Apple has to either adjust its own operations or negotiate a higher price for quicker delivery of their chips. The other companies are facing the same decision to make and if they choose to negotiate, the price of chips will keep rising. In either case, companies’ operations are affected and the supply of chips remains constant. This kind of scenario has been happening across multiple industries for months now and everyone is feeling the pain.

When Will The Shortage End? My Thoughts

The chip shortage has revealed the delicate nature of chip manufacturing. With such unprecedented events occurring, it is almost impossible to definitively say when the shortage will end. A year or more could pass and we still might be feeling the shortage. That being said, I believe many companies have realized how reliant they are on their chip suppliers. In the near future, we may see some companies adjust their own supply-chains to alleviate their dependence. Also, if a company finds it feasible to produce their own chips then we may see an alleviation of supply that way as well.

A great example of this is Apple. Before the pandemic began, Apple announced its plans to produce their own chips for their devices. I am sure that the pandemic has sped up their plans to make their own chips and also given other companies the idea to do the same. Being reliant on your suppliers is one thing but being solely dependent on them is another. The shortage has created an opportunity for the chip manufacturing landscape to change. In the coming years, I feel we may see companies adapt or announce their own plans to manufacture chips. But for right now, how long will the shortage last? We will have to wait and see.

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