[Editorial] Chip Shortage

What is a chip?

  • Integrated circuits are commonly called chips. They are the components that make electronic items like mobile phones smart.
  • These are made from silicon and perform a variety of functions.
    • Memory chips are relatively simple and help store data. These are traded like commodities.
    • Logic chips are more complex. These act as a device’s brain and help run programs. These are more expensive.

Who are the major manufacturers?

  • While chips often carry names like Nvidia or Apple, there aren’t actually manufactured by these companies. These companies only design the chips. The chips are manufactured in ‘foundries’.
  • Some of the major manufacturers are:
    • TSMC: it pioneered the chip manufacturing business in the 1980s with government support from Taiwan. Now, it produces some of the most sophisticated chips. It share of the foundry market is more than the combined share of its next 3 competitors.
    • Samsung: this South Korean manufacturer is known for its memory chips. In the recent times, it has been improving the production technology and winning over companies like Qualcomm and Nvidia.
    • Intel Corp.: it is a US heavyweight in the foundry business. It is mostly focused on manufacturing its own brand of chips that serve the desktop computers’ and laptops’ central processing unit. It has been affected by production delays in the recent past. It is now set to establish new foundries in Arizona and buy up other chipmakers.
    • Other manufacturers include GlobalFoundries Inc. (of USA), Semiconductor Manufacturing International Corp. (of China) and United Microelectronics Corp.(of Taiwan). These players are several generations behind TSMC’s technology.
    • While other famous names like IBM, Texas Instruments and Motorola have previously tried their hands at the foundries business, they have exited after failing to keep up with the advanced manufacturing requirements in the field.

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How competitive is the field?

  • There are many challenges in manufacturing the advanced variants of these chips- need for extraordinary precision, long term bets, expensiveness, need to run 24/7 to recoup the investment and the rapidly changing nature of the field.
  • In addition to this, the foundries require enormous amounts of electricity and water. They are vulnerable even to the slightest disruptions– whether from a distant earthquake or a simple dust particle.
  • Currently, the two giants of the field are spending in billions to cement their position in the field- TSMC and Samsung.
  • China is taking efforts to reduce its reliance on US technology in response to moves by the American giant to restrict its access to IP like softwares and other gears for designing chips.
  • However, China has a long way to go. In automotive sector, for instance, the Chinese chip design firms still aren’t able to develop advanced chips that could act as the brain for smart cars. The country has now pledged to increase spending to boost its chip designing capacity as part of its 5 year economic blueprint.
  • Taiwan has emerged as a dominant player in this field- in part because of its government’s decision to promote its electronics sector in the 1970s.
    • It was aided in this effort by a tech transfer deal with a former US electronics giant, RCA Corp. The trend of outsourcing from the West also aided this push.
    • Now the country has grown to such an extent that it would now take more than $1 trillion over 10 years for USA to realize ‘complete manufacturing self-sufficiency’ in chips, according to Boston Consulting Group and the Semiconductor Industry Association.
    • In this context, USA holds significant interest in the island nation’s chip sector- especially in view of how China has become increasingly assertive in its claims over Taiwan.

What are the fallouts of chip shortage?

  • The recent chip shortage has had massive fallout across the sectors- automobile manufacturers across the world have slashed production and broadband providers are facing months-long, and in some cases year-long, delay for internet routers.
  • The shortage is expected to cause a production loss of 7.7 million vehicles– wiping out $210 billion worth of sales for automakers this year. Some automakers have outright suspended output from certain plants- like Toyota, in September.
  • The major players like TSMC and Samsung have warned of the imbalance in the global supply and demand for chips. TSMC has forecasted that this shortage would extend into 2022 too.
  • Apple, in April, said that the chip supply shortage was reducing the sales of its Macs and iPads– leading to revenue loss in billions. iPhones joined the list in July.
  • Even the gaming sector has been affected. The shortage has slowed the production of gaming devices by the likes of Nintendo Co.

Why is there a shortage?

  • Lockdowns: the pandemic has brought about a ‘stay-at-home’ shift across the world due to lockdowns. This spurred the demand for laptops, monitors, networking gears and webcams. The laptop sales have been the highest in a decade. The lockdown also spurred demand for home appliances like TVs and air purifiers- many of which come with customized chips.
  • Fluctuation in forecasts: automakers had underestimated the rebound in car sales following the initial stages of the pandemic. As a result, they had to rush to place more orders for chips to keep up with the demand in late 2020. However, the chipmakers’ capacity was already stretched thin by catering to the computing and smartphone giants.
  • Stockpiling: PC manufacturers were giving warnings about tighter supplies even in early 2020. Around mid-2020, Huawei (Chinese smartphone manufacturer and a global giant in 5G networking gear) started building up inventory to ensure its survival against US sanctions. The sanctions threatened to cut off its access to its primary suppliers. Other firms followed suit. China’s chip imports rose to $380 billion in 2020 (compared to $330 billion in 2019).
  • Disasters: the February cold snap that affected Texas led to power outages– shutting down the semiconductor plants in Austin. It was only by late March that Samsung could bring its facilities back to normal. A plant of Renesas Electronics Corp. (major manufacturer of automotive chips) in Japan was damaged by fire– leading to disruption in production for months.

What is the way ahead?

  • USA, which still leads in chip design, is looking to encourage its companies to establish and expand foundries domestically to address what it calls a risk to national and economic security. The CHIPS for America Act is a massive subsidy program allocating some $50 billion to address the ‘technology gap’ in semiconductors.
  • Officials in the EU are looking for ways to build an advanced semiconductor factory with the assistance of TSMC and Samsung. EU has set a goal to double its chip production by 2030 to capture 20% of the global market.
  • UK is investigating Nvidia’s $40 billion deal to buy Arm Ltd. (British semiconductor designer) on grounds of national security and anti-trust grounds.
  • In the coming years, hundreds of billions will be spent in a global race to expand chip production. This has significant economic as well as geopolitical implications.
  • At the same time, the demand for more powerful and energy efficient chips is expected to grow with the proliferation of 5G mobile networks and with more people working from home than ever before.
  • TSMC and Samsung are working to reduce the size transistors so that more can fit on a single chip. With regards to chips, even the small improvements can yield substantial savings– especially when considered on a larger scale.
  • The rise of AI, which relies on massive data processing, is pushing the frontiers of innovation. Improving the efficiency of designs could pave the way for IoT’s advent.

Conclusion:

Chips are possibly the tiniest, yet most exacting of products manufactured globally. Over the coming years, the countries are set to spend billions to improve their chip making capacities in a global race.

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