Supply chains disruption deepens global chip shortage

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Last Updated28/05/2022

Pandemic affected global chip shortage.
The duo has hit established economic systems worldwide, and made several organisations scale back production and rework their manufacturing and supply chain processes.

Laptop market growth slowed down with rising alternatives such as smartphones and tablets after 2011
During pandemic people switched to WFH, children learned through laptops etc.
It led to rise in demand for laptops and tablets.
Each of these devices runs on semiconductors, performing various functions on a single device.
Manufacturers produce them as 200mm or 300mm wafers.
- These are further split into lots of tiny chips.
- While larger wafers are expensive and mostly used for advanced equipment, devices in high demand needed smaller diameter wafers.
But the manufacturing equipment needed to make them were in short supply even before the pandemic began.
- Because the industry was moving towards 5G and advanced communication, which required expensive wafers.
High consumer demand for low-end products, coupled with large orders from tech firms chocked chip makers whose factories were also closed during lockdowns.
As the industry gradually tried to pull itself out of supply crunch, logistical complexities increased problem.
Russia’s invasion of Ukraine has strained exports of essential commodities used to make chipsets.
- Moscow supplies rare materials like palladium, and Kyiv sells rare gases to make semiconductor fab lasers.
- This combination is required to build chipsets that power a range of devices, from automobiles to smartphones.

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About half a decade back, semiconductors barely drew attention from large companies.
- During this period, firms developed a system to make chip sets.
- It was made by interconnecting several parts of the world to make a single device creating global supply chain.
- Its roots go back to when companies began cutting up their businesses into smaller parts and outsourcing them to places where land, labour or capital was cheap.
- Semiconductor-making firms applied this knowledge to their industry.
The process to make a chip was divided into front-end and back-end parts.
- It was further broken down into micro-units and spread out across the globe, creating a global chip-making ecosystem.
This ecosystem is so vast that each segment of the semiconductor manufacturing involves roughly 25 countries in the direct supply chain, and 23 countries in allied functions, according to a study.
That’s a complex, interconnected ecosystem with its own ebb and flow.
The industry faced its share of shortages in the past decade as consumer preferences shifted from one electronic fad to another.
This time, the shortage in the system coincided with the pandemic.
It also came at a time when the semiconductor supply chain’s chief strength became its weakness.

Developed during WWII, Just-In-Time (JIT) was used by Japanese companies that lacked resources and space to rebuild factories by carefully using what they had in the leanest way possible.
Most companies, including chip makers, used JIT to run their supply chains smoothly and efficiently.
JIT lets firms take inputs from suppliers only when they are needed.
It helps them cut inventory storage costs, shorten production cycles and free up cash flow for other investment activities.
This important aspect of supply chains backfired due to the pandemic, and the recent geopolitical events.
When the pandemic began, carmakers stopped requesting chips from suppliers due to low demand for new vehicles.
And now, as they increase production, chipmakers are down on supply because they have cut deals with other industries.
As the geopolitical events in Central Europe and production shutdowns in China continue to add pressure, chip shortage tunnel only seems to be getting longer.

Semiconductor-hungry firms may see light at end of the tunnel when the shift in chip production capacities shows up more prominently in the West.

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