Today’s chip shortage: Understanding the perfect storm that led us here

Today’s chip shortage is being felt globally in virtually every industry, even though the impacts differ across markets, products, chips, and in some cases, process nodes. When chips are in short supply, chip suppliers and OEM chip consumers face unique challenges on the road to recovery.

As the world started to reopen in the spring of 2021 after a year of the COVID-19 pandemic, prices and lead times rose sharply for many electronics products. For example, the price of a new car has risen by about 10%, and availability has been delayed by three to six months or more. Internet infrastructure, video games, PCs, smartphones, and other electronic products face similar market hiccups. The common denominator in all these industries is a lack of chips.

So why is a chip shortage happening now?

It’s easy to blame the pandemic. However, while COVID-19 exacerbated the chip shortage, many other contributing factors collectively exposed vulnerabilities in the global semiconductor supply chain that produced this perfect storm of disruption. (See Figure 1.)

Today’s chip shortage has been caused by many contributing factors – geopolitics, industry trends, industry best practices, pandemic stressors, and the natural dynamics of supply and demand economics – that together have created something of a perfect storm of supply chain disruption.

Let’s start with three established industry trends that, while designed to optimize supply-chain efficiency in normal times, contributed to the shortage and slow recovery.

• OVER-ORDERING AND STOCKPILING: Pre-pandemic, US-China trade tensions were already disrupting supply-chains, with a visible global impact on chip suppliers and consumers. Concern over supply disruptions triggered some over-ordering to keep production lines running until tensions eased. In early 2020, the pandemic triggered further stockpiling out of the fear of additional supply chain unbalance and transportation cutbacks.
• INDUSTRY NOT-SO “BEST” PRACTICES – Chip inventories are kept low for most industries because just-in-time inventory management and ordering practices are common. However, stockpiling and pandemic fears quickly drained the remaining supplies of some chips as fab production slowed and eventually stopped for some processes. In addition, second sourcing – an effective risk mitigation strategy against supply-chain instability – is not common in the semiconductor industry, which further impacts the industry’s ability to replenish supply quickly.
• CONTENT-PER-PRODUCT AND CHIPS-PER-SYSTEM ARE GROWING – Smarter, connected, feature-rich products require more chips per product to enable these functions. Naturally, this growing trend across many industries – 25% growth from 2016 to 2021, according to IDC – consumes chip inventories faster.

On top of these precursors, the pandemic created additional stressors that triggered the shortage we’re experiencing now.

• CHANGES IN CONSUMPTION – The pandemic transitioned billions of workers from in-office to work-from-home environments. This required companies to invest in laptops and communications equipment for their home-based workforces that overwhelmed chip demand in very specific but previously unpredicted markets. In addition, competition for a dwindling number of chips for these and other electronic products tightened supply further.
• FAB CAPACITY – As the pandemic continued into the summer of 2020, many fabs slowed and even shut down production of some processes. Bringing a new fab or process online quickly is time-consuming and costly, limiting most manufacturers’ abilities to add capacity as a short-term solution.
• SUPPLY REPRIORITIZATION – In early 2020, many automakers cut orders in response to a drop in sales. However, when demand rebounded later in the year, chips formerly allocated to automotive customers were already committed to other industries. As a result, auto OEMs burned through excess inventory quickly and were forced to wait in line for supply to ramp back up.

The causes of today’s shortages are complex, interrelated, and the impacts vary by industry, product, and process. Recovery is likely to be similarly complex, with some market segments recovering quickly and others lasting several years.

The next three blogs in this series will delve a little deeper into what each link of the supply chain – chip suppliers and chip consumers – are doing to help speed the recovery.

• The second post offers practical insights into how chip designers can leverage process and fab migration strategies to quickly replace the devices experiencing the worst supply shortages and prevent them from being bound to a single process node or single fab in the future.
• The third post focuses on the options and strategies in use by OEMs to cope with the shortages they’re experiencing.
• The fourth and final post in this series shares some new best practices that chip developers and system companies can adopt to avert future supply-chain disruptions and make their designs more portable and reusable.