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Short circuit: Will the chip shortage end this year?

With tech remaining in short supply, we explore whether the industry can get supply chains up and running any time soon

If you’ve bought any new computing equipment over the past couple of years then congratulations – it can’t have been easy. From phones and games consoles, to graphics cards and networking gear, the entire industry has been throttled by the ongoing shortage of semiconductors. 

Even the biggest companies have been hit – last year, Apple was forced to scale back manufacturing plans for the iPhone, and more than a year after launch it is still virtually impossible for consumers to buy a PlayStation 5.

Is there any sign of things returning to business as normal or should we expect shortages for the foreseeable future

A big problem for small companies

“If you can't build PlayStations or iPhones, we don't stand a chance,” laughs Sue Ballard, the customer support manager at Offshore Electronics, a contract manufacturing firm in Guernsey. It makes the digital guts for everything from cat-flaps and escalators, to critical hospital equipment, such as power supply units and even ventilators.

“Our efficiencies have gone down the pan,” says Ballard. “We're doing the same job five times over, we've had to change quite a lot of our processes. We're a different company.”

The problem Offshore faces is a severe shortage of components, as one missing piece can cause a knock-on and delay the entire manufacturing process. But the crisis has caused other stresses on the business too. 

“Normally you place one purchase order and it's done, the bits come in, you pay it and you don't have to worry about it,” says Dan Attewell, the company’s technical sales director. “But, at the moment, if that stock doesn't come in we've got to go and buy some more. So, you’ve got to raise two purchase orders and you've got to pay two suppliers to get the same amount of bits.”

Even if supplies eventually arrive, it creates chaos for scheduling. “We buy all of the parts in for the month before [the finished item] is due to the customer,” says Attewell. “So we've got a manufacturing window of, say, four weeks. But we might not have all of the bits now until the week before the product's due. Your window gets shorter and your planning is worse, and you then have this massive peak of everything all at once. It's great that we're so busy, but it's an absolute nightmare.”

According to Ballard, it is particularly chaotic because suppliers will often “decommit” at short notice and not deliver what they had promised. It’s a well-known phenomenon in economics known as the ‘bullwhip effect’.

“Information gets distorted and people start to play games with their orders,” says John Fowler, an Arizona State University professor and Motorola professor of supply chain management. “People may order twice as much as they need knowing they're going to get their order cut. And so this whole distortion of information moves all the way back through the chain, which causes the people that are at the very end of the supply chain to get whipped around.”

It’s more than the COVID-19 pandemic

Unsurprisingly, the most significant factor behind the shortages is, of course, the COVID-19 pandemic. “Demand for computers at home increased greatly because people were now working from home and needed to upgrade their equipment,” says Fowler.

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It wasn’t just our changing work habits, though, as the policy response of governments around the world had consequences too. “Almost all of the shutdowns came with some form of salary support, some some form of the government giving you money to just take it easy, which meant that unlike any other sort of recession, money was not in short supply,” says Hamza Mudassir, a visiting fellow in strategy at the Judge Business School at Cambridge and co-founder of tech consultancy Platypodes.

A spike in demand was not helped by a shortage on the supply side too, both due to COVID-19 restrictions in countries such as Malaysia, and the need to divert resources elsewhere. “It turns out that the same silicon that is used for semiconductors is also used to make vials for vaccines,” says Fowler. “So that drove up the price for the silicon.”

The pandemic isn’t solely to blame. Another factor is that some of the world’s largest chip suppliers have fallen victim to a series of unfortunate disasters. “There was a plant in Japan owned by a company called Renesas that caught fire,” says Stephane Crosnier, supply chain and operations lead at consultancy firm Accenture. “This plant was supplying about 30% of the worldwide capacity for [some] specific chips.”

Similarly, during 2020, another major fire hit the Unimicron plant in Taiwan, which produces the substrate used to make chips, and a prolonged power outage in Texas shut down major chip foundries around Austin, which are major producers of the wafer on which integrated circuits are printed. “If we hadn't had the pandemic, there was enough shock absorption in the system to handle those incidents, but when it was already on the edge, those things just made it that much worse,” says Fowler.

Slipping back to normality

Given the lack of supply and the enormous demand, the next question is obvious: can’t more chip foundries be built?

“The problem that comes with high-end semiconductors is that they are notoriously difficult to make,” says Mudassir. “The latest Intel processors, the new PlayStation, the new Xbox Series were all designed in a 7nm process that can only be done by a handful of companies in the world.

“The foundries where the semiconductors are built are very, very hard to actually build. It can take billions of dollars and three to four years for you to get to a point where a 7nm or a 4nm foundry is fully functional and running at capacity.”

Mudassir is optimistic that there will be good news – eventually. “Now what we have is a block of time that everybody is stuck in,” he said. “Foundries are being invested in, people are being trained, everybody's working their hardest, but the actual laws of physics are going to prevent you from getting a foundry up and running until there's a major technological breakthrough.”

Consequently, you shouldn’t expect a return to normal buying patterns anytime soon. “When you look at what companies are saying in this space, I think they still expect 2022 to be very, very difficult and are starting to say they're probably not expecting any back to normal before 2023,” says Crosnier, who also warns that further COVID-19 developments, such as a major outbreak in China, could continue to cause problems.

This is in line with what Offshore Electronics are expecting too, though there is clearly still a lot of uncertainty. “I think we're probably still maybe another year away from seeing that really come to fruition,” says Attewell. “We're seeing little glimmers here and there. We're looking for bits every day and [sometimes] someone would decommit us, and the next thing you know the truck turns up here and we've got loads of bits. And even the supplier didn't know they were coming in.”

In fact, fixing the chaotic information environment could be what helps fix the chip supply chains – and make them more resilient. “We are advocating what we call the creation of a supply chain stress test,” says Crosnier. 

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“You may remember that on the back of the financial crisis in 2008, financial institutions had to undergo financial stress tests to prepare for that, so we are developing something very similar for companies to be able to first get a measurement of their supply chain resilience and, second, identify their point of weaknesses in supply chains.”

In the meantime, there is cause for optimism. Even though it may take some time there is light at the end of the tunnel. “We may very well, in 2023, go from having a shortage of chips to having more capacity than is needed,” says Fowler. “Because when you build a factory, these days, a modern factory can produce a tremendous amount of chips. Intel is building a factory. TSMC is building several new factories, Samsung is building new factories. So you've got a lot of capacity that is going to come online in 2023.”

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