The Significance of the Semiconductor Squeeze

March 2020: Covid-19 grapples the UK and we’re thrown into a severe lockdown. Words like ‘pandemic’, ‘self-isolation’, and ‘Covid’ are given a new lease of life; supermarkets supplies are rampaged by the public ordered to ‘stay at home’.  Fast-forward almost 20 months, and the lack of toilet roll on the shelves is almost starting to seem like a distant memory. As we emerge from the depths of a global phenomenon, we’re navigating the personal ‘new normal’, and businesses are trying to ‘build back better’. Yet one area of production that no one suspected would struggle is now grappling to stay afloat. Contrary to their nanometer measurements (one billionth of a meter), the semiconductor shortage is immense. And it’s only getting bigger.

The Life and Soul of the Party

Semiconductors are the beating hearts of electronic devices, used to manufacture computers to mobile phones, cars to games consoles. In our exponentially-digitising world, it doesn’t take a rocket scientist to work out that they’re in constant, high demand. But what couldn’t be worked out was an impending pandemic and the consequent impacts.

Thanks to ‘stay at home’ orders, our houses became our world overnight. Employees needed tech, fast; students needed access to virtual learning; people craved entertainment that didn’t involve baking a 10th banana bread. Demand for accessories like webcams, monitors and computers increased tenfold; traditional computer sales saw a whopping 26.1% growth in the fourth quarter of 2020 over the previous year. 

Trying to Predict the Unpredictable

As many industries get to grips with adapting business models and processes in a post-pandemic world, over 169 remain troubled by the 2020-21 global chip shortage. Demand for semiconductor chips continues to exceed supply, especially in the automotive sector. As the pandemic took hold, many car manufacturers cancelled orders for chips as they thought sales would decrease.

However, global demand for the tiny materials grew by 15% last year. But combine this shock pressure with a workforce unable to work because of self-isolation, halted productivity in February at a major Texas plant due to storms, a huge fire that raged through a Japanese factory in March, and that cargo ship that got wedged in the Suez Canal. Name a more modern recipe for disaster?

Hitting the Brakes

In a stark warning to fleet decision-makers, Tom Blackie, founder and CEO of VNC Automotive says, “It’s become clear that the effects of the semiconductor shortage will long outlast the pandemic.” To put it in context, vehicles require between 50 and 1,000 semiconductors depending on their complexity.  Implications for future sales and developments are apparent; it’s reported that fleet and business new car registrations were down by 33% in July 2021 compared to the same time last year.

In an automotive shake-up, vehicle production lines have been temporarily halted. Nissan has said it will make 500,000 fewer vehicles resultant of the shortage. Back in May, Ford had to go as far to park thousands of unfinished vehicles waiting on chips at the Kentucky Speedway, an expensive sight to behold. Other manufacturers are going to extreme levels to try to retain production levels; Stellantis has replaced digital instruments with analog on the current Peugeot 308; some Citroen models no longer have the option for wireless phone charging.

A Game of Cat and Mouse

Though plants are now able to reopen at more of a ‘usual’ capacity, there’s a big game of catch-up to be played. Even tech giants like Apple that are usually prioritised by suppliers aren’t immune to the effects; the lack of semiconductors is affecting the production of iPads and Macs, with the supply constraints causing sales to lag by $3-4bn. “Prices are definitely going to be higher for a lot of devices that require a semiconductor,” says David Yoffie, a Harvard Business School Professor. And as the festive season draws closer, there’s a real sense of urgency in the tech sector.

Despite its standing as the fastest-selling console in US history, Sony’s PS5 may not hit sales targets because of the issue. Likewise, Microsoft’s Xbox’s supply issues have continued into the latter half of this year. Nintendo has forecasted a 12% drop in sales in the financial year ending in March 2022 of its flagship console Switch, in stark contrast to their immense sales performance during the pandemic thanks to an increased demand for home-based entertainment.

It was a perfectly unpredictable storm, and one that’s probably going to have to get worse before it gets better. The peak of this particular curve is expected to have passed by early 2023, the demand-supply equilibrium restored. The full impact of the semiconductor squeeze remains to be seen; what we can take away is a whole new meaning of the importance of keeping your chips close to your chest.