The Russian invasion is making the global chip shortage situation worse

• Ukraine supplies rare gases used to produce semiconductor fab lasers, and Russia exports palladium to make semiconductors.
• Thus, the contribution from both countries is required to build chipsets that power automobiles and smartphones.
• As Russia invaded Ukraine, it got hit by various Western sanctions.
• This could disrupt the country’s exports, leaving the semiconductor firms fewer options to source raw materials to make chipsets.

How did the shortage crisis begin?

• After reaching its peak in 2011, the laptop market growth slowed down with the rise of alternatives such as smartphones and tablets.
• Then, the pandemic hit and shift led to a surge in demand for laptops and tablets.
• These devices in high demand run on thumbnail-sized semiconductor pieces performing various functions on a single device. And manufacturers produce them as 200mm or 300mm wafers.
• These are further split into tiny chips.
• While the larger wafers are expensive and mostly used for advanced equipment, the devices that were in high demand needed smaller diameter wafers.
• But the manufacturing equipment required to make them were in short supply even before the pandemic began.
• That’s because the industry was moving in the direction of 5G, which required expensive wafers.
• But 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 the supply crunch, logistical complexities exacerbated the problem.
• And then cost of moving containers across the world drove up the price of the core component used in most electronic devices and automobiles.

Why is the Russian invasion impacting chip shortage?

• Palladium is often used as an alternative to gold in making various devices as the metal is highly malleable and resistant to corrosion.
• The rare metal is considered to be softer than gold, but is still much harder and more durable than the yellow metal.
• This quality of palladium gives it more protection against an impact and a greater resistance to denting. So, automobile makers, electronics manufacturers and biomedical device producers prefer silvery-white metal.
• Russia and South Africa are the two largest producers of palladium.
• The silvery-white market would move into a severe deficit without those supplies, pushing the price up.
• While platinum and rhodium could be substituted for palladium, Russia is also a leading producer of the other platinum group metals.
• Palladium is used in nearly all electronic devices, and it is key to making chipsets and circuit boards.
• It is used to make multi-layer ceramic capacitors (MLCCs), which are important to make smartphone screens, stereo systems, and power circuit breakers.
• As Russia’s invasion of Ukraine escalates, the country is getting hit by Western sanctions.
• This could disrupt the country’s exports, leaving the semiconductor firms fewer options to source raw materials to make chipsets.

How are businesses and governments adapting to these changes?

• With the recent trends in electric mobility, automotive safety, and the Internet of Things (IoT), the demand for semiconductors is only going to grow.
• But this growth is coming at a time when products are being built on global supply chains.
• So, businesses are inversing their offshoring plans. They are considering ‘reshoring’ as an option to be shielded from global supply chain disruptions.
• Reshoring production can create improvements that may help in the event of a shortage.
• For one, it is much easier to control production aspects like quality and control processes for onshore manufacturing.
• There are fewer governmental restrictions when production is held onshore.
• There are benefits for the local community when manufacturing is done locally according to a research paper titled by California Polytechnic State University.
• Intel, one of the few companies that both designs and makes its own chipsets, announced last month, $20 billion for two new chip fabrication facilities in the state of Ohio.
• The company plans to invest $100 billion over the next decade, and build eight more fab factories in the state.
• At the other end of the spectrum is government support to provide a conducive environment for businesses to set up facilities to build semiconductor factories.
• India recently cleared a ₹76,000-crore scheme to incentivise companies to design and make semiconductors.
• While business strategies and government policies could help in solving the chip crunch, in the long run, the current semiconductor shortage is here to stay with us in the near term.