Component Shortage – Causes and Next Steps

December 2, 2021

If there’s one word that describes life in the 2020s, it’s “digital.” We’re surrounded by gadgets from our watches to our phones to our tablets to our laptops. Futurists are calling it the fourth industrial revolution and it’s ushering in lifestyles based on the Internet of Things (IoT) and artificial intelligence.

Components drive all this progress, especially semiconductors and integrated circuits – what everyday people call computer chips. These days, if you plug it in, there’s almost certainly a chip inside it.

The downside of digital technology is that we’ve become utterly dependent on the hardware. COVID-19 has disrupted the supply chain for these vital components. As a result, industries around the world are struggling to maintain production.

By all accounts, the hardest hit industry in the global chip shortage is automotive. Today’s vehicles are built around computer technology, both under the hood and inside the dashboard. Industry analysts believe that, although production levels are rising, the shortage could last well into 2022.

Could Last Well Into 2022

In fact, this insatiable appetite for computer chips in the auto sector is part of the reason we’re facing a global shortage. Computer chips are made in semiconductor fabrication plants, often called foundries.

The nickname makes them sound old-fashioned, but foundries require a range of advanced, costly devices to operate. It’s not unheard of for corporations to invest as much as $10 billion to start a new fabrication facility. Even before the pandemic, investors were sceptical that building enough foundries to meet the demand created by the car companies would justify the massive investments required.

When the pandemic hit in the second quarter of 2020, the automakers had to shut down. As part of that process, they also voided their arrangements with many of their microchip suppliers. In hindsight, this may have been unwise, because foundries immediately sought out other customers in global markets that were less affected by COVID-19.

Meanwhile, employers asked masses of people to work from home. While setting up their home offices, they upgraded their home computers and peripherals. Since the kids were also home from school and learning remotely, many families needed to add devices to keep everybody happy and productive. Consumer electronics for home entertainment also experienced a sales boom.

All those people suddenly working from home drove demand for more storage capacity at cloud computing service providers including Microsoft, Alibaba, AWS and Azure. Whenever these firms need more storage, they need more semiconductors.

Coincidentally, the smartphone industry had scheduled the rollout of the next generation 5G technology, also for the spring and summer of 2020. Trade relations between the US and China grew tense, causing one of China’s largest 5G smartphone producers, Huawei to place massive orders with the foundries ahead of the deadline for trade sanctions. Not to be outdone, Apple and many other smartphone manufacturers followed suit.

The rise of cryptocurrency also put a big dent in the chip supply. Mining new Bitcoins, for example, requires enormous levels of computing power. Speculators snap up all the graphics processing units (GPUs) they can get their hands on, and those specialized circuits are one more microchip application.

Next, to complete the perfect storm, the world suffered two natural disasters that had major effects on microchip production. An earthquake in Japan caused a fire at a microchip foundry there. The winter storm in Texas caused a power failure and shut down several foundries in that state.

Profit Margin Much Higher for High Tech

The profit margin on the latest and greatest chips for the high-tech sector is much higher than it is for the legacy node technologies that the automakers and other industrial manufacturers order. Also, it’s taking these industries longer to retool than tech companies. So, now traditional manufacturers find themselves at the back of the line as the foundries ramp up for the new normal.

In the wake of all this, the microprocessor industry perceives the auto sector as higher risk. For example, while car makers were phasing out contracts, the gaming industry placed steady orders for high-margin products. Businesses following the just-in-time inventory strategy, like automakers, have proven more challenging to serve for the foundries compared to the available alternatives.

The chip shortage has affected Asia differently than North America. For example, Japan is no stranger to natural disasters like tsunamis and earthquakes. Industry watchers say that the Japanese automakers, like Toyota, are coping much better with business recovery.

The options for traditional manufacturers dealing with the components shortage aren’t much different than those mentioned under shipping. You can pay, or you can wait. Businesses that are willing to pay top dollar in a seller’s market may be able to get their orders moved to the top of the pile.

Otherwise, traditional manufacturers like carmakers may need to work on their patience. Beyond that, they can try to enhance existing relationships with the semiconductor fabricators by negotiating more win-win arrangements.

For example, Ford is now working more closely with the foundries and related suppliers. They’re committing to longer range procurement forecasts to, as CEO Jim Farley put it, “better align supply and demand.” Similarly, Tesla has been tracking down alternative suppliers and obtaining suitable alternative components while making design modifications, although this has proven costly for the electric vehicle innovator.

“Better Align Supply and Demand”

Ford is also adjusting its manufacturing processes. They’ll be producing more built-to-order vehicles. They’ll be rationing their finite chip supply to customer orders, new vehicle launches and high margin products.

Kingstec can help your business unearth new sources for required components or help reconfigure your existing design to take advantage of those that are available without sacrificing quality or performance. We have the ability to leverage our contacts across the globe to get the critical components you need in a cost-efficient and timely manner to ensure your projects stay on track.

Nobody knows the Asian manufacturing sector like Kingstec. We have been supporting brands who need offshore manufacturing capacity for nearly 40 years. We can introduce you to high-quality, cost-efficient manufacturing partners in Asia, which remains the world’s workshop.

Why not call us today to discuss how you can mitigate the risks arising from ongoing global supply chain volatility?

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