Explained: How the tech world is tackling the chip shortage

Why is there a semiconductor shortage?

The global semiconductor shortage has affected many industries for more than a year and because of that, they are either forced to pay more for products or being asked to wait a little more. The shortage has affected smartphones, personal computers, game consoles, automobiles, and medical devices.

In October, Apple said it lost $6 billion to chip shortage in the last quarter and expects an even greater loss from supply chain issues in the December quarter. Japanese gaming giant Nintendo revised sales forecast for the fiscal year “due to the effects of the global semiconductor shortage”. Nintendo said “there has not been a major improvement in the situation” since the beginning of the fiscal year. Sony, too, expects to make fewer PS5s, a console that’s already in short supply since it launched back in November last year.

Chips or processors power every possible product on the market from high-end cars to washing machines. As Dr. Abhisek Dixit, Professor in the Department of Electrical Engineering, Indian Institute of Technology – Delhi, explained, “The consumption of integrated circuits in products is ever increasing and a large manufacturing sector for these kinds of integrated circuits are a part of the supply chain.”

During the pandemic, manufacturing came to a standstill impacting the supply chains of products that need one or more of these. As the automotive sector almost shut down last year, chip makers shifted capacity to cater to increased demand for electronics items such as cell phones and laptops. Since orders for advanced chips are placed well in advance, manufacturers have not yet been able to come back to pre-pandemic production schedules to cater to all sectors.

The automotive chips are of medium-level complexity, compared to the really small and extremely complicated ones on smartphones and personal computers. Building something this small, featuring billions of transistors is an expensive process.

Dixit explained that while chip design has not been affected, “chip fabrication or manufacturing line is really where the factory comes in” and the process can take a few months. “The foundry is not one factory, it’s an ecosystem,” Dixit said, adding that a cutting-edge fab costs $10 billion to build. It also requires lots of clean water, uninterruptible electricity, and a skilled workforce. “When you talk about manufacturing a chip, you are not going to get Elon Musk, or Jeff Bezos to invest into chip manufacturing… these are basically legacy technologies where there are decent returns but there are also very high risks involved,” he said.

What’s happening in the sector now?

Big brands like Apple and Qualcomm design their own chips using the ARM architecture but outsource them to companies like Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract manufacturer for chips. Lately, companies like Intel which design and manufacture their own chips too have started outsourcing some manufacturing to TSMC.

“There are many factors that can ruin a forecast including virus status, government relations, supply chain factors, etc,” Jon Peddie Research analyst Ted Pollak told The Indian Express. Pollak predicted that things will stabilise by March next year.

Intel, Samsung, and TSMC have all announced new fabs in recent months but as Dixit explained these fabs take years to build. This means the semiconductor shortage could linger for long, because companies are placing more orders and holding more inventory.

Things could get worse. While Moore’s Law continues to push for smaller transistors, the clock-speed gains are modest. To improve chip designs, companies will need to experiment with new architectures and new techniques.

Has India missed the bus in setting up chip factories?

Dixit does not agree. From an investor’s point of view, he explained, there is a lot of risks involved in setting up a chip plant. Past initiatives to set up chip manufacturing units in the country never took off due to lack of long-term vision, lack of government incentives, and poor planning. Now the government is keen to promote the manufacturing of semiconductors in the country and has even proposed tax incentives for those who set up state-of-the-art fabs in India.

Things are progressing slowly, but the recent announcement of Tata Group entering semiconductor manufacturing is being seen positively. Last year, US-based memory chipmaker Micron Technologies had announced that it will set up a Centre of Excellence in memory and storage systems in India. Micron is a major supplier to Apple. As of now, the ISRO has a fab foundry in Chandigarh and the DRDO has one too in Bengaluru.

“Within a few years, we should have, if not a full-fledged production-level chip manufacturing unit, something like a prototyping level chip unit in working order,” Dixit said.

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How is the chip crisis playing out in geopolitics?

The global chip crisis and geopolitical tensions with China have shifted focus back on semiconductors. The US, which was once a leader in chip manufacturing, wants the crown back. Under President Joe Biden, the US is looking to bring manufacturing back to America and reduce its dependency on a handful of chipmakers mostly concentrated in Taiwan and South Korea. China’s renewed aggression on Taiwan is also being seen in light of the chip crisis.

Semiconductor manufacturing is now dominated by TSMC in Taiwan and Samsung Electronics in South Korea. American chipmaker Intel now plans to spend $20 billion to build two new chip factories in Chandler, Arizona. These new fabs will also manufacture chips designed by Amazon, Qualcomm, and other customers.

The crisis is expected to cost the global automotive industry $210 billion in revenue in 2021, according to consulting firm AlixPartners. This is why American carmakers Ford and GM are also getting into chip development to become self-reliant. Ford has signed a non-binding agreement with GlobalFoundries, whereas GM is working with a number of semiconductor companies like Qualcomm, STMicroelectronics, TSMC, and NXP Semiconductors.

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