Supply chains disruption deepens global chip shortage

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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.

Intricate networks

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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.

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.

Exam track

Prelims take away

  • Semiconductor chip