Supply chains disruption deepens global chip shortage
- 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.
Genesis of shortage
- 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.
- 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.
Strength becomes 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.
Prelims take away
- Semiconductor chip