Carmakers slashed production. PlayStations got harder to find in stores. Broadband providers faced months-long delays for internet routers. All of these phenomena and more had a similar cause: an abrupt and cascading shortage of semiconductors.
Also known as integrated circuits or more commonly just chips, they may be the tiniest yet most exacting product ever manufactured on a global scale. The combination of cost and difficulty in producing them has fostered a worldwide reliance two Asian powerhouses — Taiwan Semiconductor Manufacturing Co (TSMC) and South Korea’s Samsung Electronics.
That dependence was brought into stark relief when the COVID-19 pandemic and rising US-China tensions made chips scarce. Hundreds of billions of dollars will be spent in the coming years in a global race to expand production, with geopolitical as well as economic implications.
WHY ARE THERE SHORTAGES?
Here are some factors:
The stay-at-home shift: This pushed chip demand beyond levels projected before the pandemic. Lockdowns spurred growth in sales of laptops to the highest in a decade. Home networking gear, webcams and monitors were snapped up as office work moved out of the office, and Chromebooks were hot for a while as schools shut. Sales also jumped for home appliances, from TVs to air purifiers, that now come with customized chips.
Fluctuating forecasts: Automakers that cut back drastically early in the pandemic underestimated how quickly car sales would rebound. They rushed to re-up orders late in 2020, only to get turned away because chipmakers were stretched supplying computing and smartphone giants like Apple.
Stockpiling: PC makers began warning about tight supplies early in 2020. Then around the middle of that year, Huawei Technologies — the Chinese smartphone maker that also dominates the global market for 5G networking gear — began building up inventory to ensure it could survive US sanctions that were set to cut it off from its primary suppliers. Other companies followed suit, hoping to grab share from Huawei, and China’s chip imports climbed to almost US$380 billion in 2020, up from about US$330 billion the previous year.
Disasters: A bitter cold snap in Texas in February led to power outages that shut semiconductor plants clustered around Austin; it was late March before Samsung’s facilities there were back to normal. A plant in Japan belonging to Renesas Electronics, a major provider of automotive chips, was damaged by fire in March, disrupting production for months.
WHO IS AFFECTED?
Chip shortages are expected to wipe out US$210 billion of sales for carmakers this year, with the production of 7.7 million vehicles lost.
“Never seen anything like it,” Elon Musk, Tesla’s chief executive officer, tweeted.
Samsung warned that it saw a “serious imbalance” in supply and demand globally. TSMC forecast the shortages could extend into 2022. Some broadband providers were facing delays of more than a year when ordering internet routers. Apple said in April that supply constraints were crimping sales of iPads and Macs, which it said would knock US$3 billion to US$4 billion off its third-quarter revenue. In July it added iPhones to the list. Nintendo said that shortages were slowing the production of its Switch gaming device. Toyota Motor suspended output at 14 plants in September.
WHAT IS A CHIP?
It’s the thing that makes electronic items smart. Made from a material, usually silicon, that “semi-conducts” electricity, the chip performs a variety of functions.
Memory chips, which store data, are relatively simple and are traded like commodities. Logic chips, which run programs and act as the brains of a device, are more complex and expensive.
These often carry names like Apple or Nvidia, but those companies are actually just the designers of the semiconductors, which are manufactured in factories called foundries.
WHY IS IT SO HARD TO COMPETE?
Manufacturing advanced logic chips requires extraordinary precision, along with huge long-term bets in a field subject to rapid change. Plants cost billions of dollars to build and equip, and they have to run flat-out 24/7 to recoup the investment. But it is not just that. A factory also gobbles up enormous amounts of water and electricity and is vulnerable to even the tiniest disruptions, whether from dust particles or distant earthquakes.
WHO ARE THE BIG MANUFACTURERS?
TSMC pioneered the foundry business — purely manufacturing chips for others — with government support in the 1980s and now produces the most-sophisticated chips. Everyone beats a path to its door to get them; its share of the global foundry market is larger than its next three competitors combined.
Samsung dominates in memory chips and is trying to muscle in on TSMC’s gold mine. It’s been improving its production technology and winning new orders from companies such as Qualcomm and Nvidia.
Intel is the last US heavyweight in the field, but its business is heavily concentrated in manufacturing its own-brand chips that serve as the central processing unit (CPU) for laptops and desktop computers. Production delays have made it vulnerable to rivals, who are winning share using TSMC to produce their designs.
Intel unveiled an ambitious bid in March to regain its manufacturing lead and break into the foundry business by spending US$20 billion to build two new factories in Arizona. It is also looking to buy other chipmakers.
Smaller manufacturers include the US's GlobalFoundries, China’s Semiconductor Manufacturing International Corp (SMIC) and Taiwan’s United Microelectronics. But they are at least two to three generations behind TSMC’s technology. Famous names such as Texas Instruments, IBM and Motorola, all US companies, have exited or given up trying to keep up with the most advanced manufacturing.
HOW IS THE COMPETITION GOING?
The two giants are spending heavily to cement their dominance: TSMC said in April it would ramp up its capital expenditure over the next three years to US$100 billion, including about US$30 billion on capacity expansion and upgrades in 2021, from a record US$17 billion last year.
Samsung is earmarking about US$151 billion for a decade-long project to catch its Taiwanese rival, part of a broader plan by South Korean companies including SK Hynix to spend roughly US$450 billion to build the world’s largest chipmaking base.
China is pushing hard to catch up as part of its efforts to reduce its reliance on US technology, spurred by US moves to restrict access to American intellectual property such as software and gear for designing chips.
But China has a long way to go. For instance, in the automotive sector, Chinese chip design companies still aren’t able to come up with the advanced chips that serve as the brains for today’s ever-smarter cars. China pledged again this year to boost spending and drive research into cutting-edge chips as part of its new five-year economic blueprint.
While it did not give specifics, SMIC has announced plans for a US$2.35 billion plant with funding from the city of Shenzhen.
The facility could begin production by 2022 and eventually churn out each year about half a million 12-inch wafers, which are used to fabricate chips. By comparison, TSMC shipped about 12.4 million such wafers in 2020.
WHAT ABOUT OUTSIDE ASIA?
The US, which still leads the world in chip design, is seeking to encourage companies to build or expand advanced factories domestically to address what Commerce Secretary Gina Raimondo called a risk to national and economic security.
In a report released in June, President Joe Biden recommended Congress appropriate at least US$50 billion to support semiconductor research and production in the US (A Bill that easily passed the Senate the same day included US$52 billion.) His administration will play a role in formulating tax incentives for a proposed US$12 billion TSMC plant in Arizona and a US$17 billion facility Samsung is considering, possibly in Texas.
Similarly, European Union officials are exploring ways to build an advanced semiconductor factory in Europe, possibly with assistance from TSMC and Samsung, as part of its goal to double chip production to 20 per cent of the global market by 2030. In April the UK ordered an investigation on national security grounds into California-based Nvidia’s US$40 billion deal to buy British semiconductor designer Arm.
WHERE IS THE TECHNOLOGY HEADED?
As 5G mobile networks proliferate — driving demand for data-heavy video and game streaming — and with many people working from home, the need for more powerful, energy-efficient chips is only going to grow.
TSMC and Samsung are thus working to make transistors increasingly microscopic so more can fit into a single chip. Even small improvements can deliver substantial cost savings when multiplied across the full scale of something like Amazon Web Services, a cloud computing provider.
The rise of artificial intelligence is another force pushing innovation, since AI relies on massive data processing. More efficient designs also will help develop the so-called Internet of things — a universe of smart or connected devices from phones to light switches to refrigerators.
HOW DOES TAIWAN FIT INTO ALL THIS?
The island emerged as the dominant player in part because of a government decision in the 1970s to promote the electronics industry. It was aided by a technology transfer deal with RCA, the former US electronics giant, and the trend in the West toward outsourcing.
Matching its scale and skills now would take years and cost a fortune: Boston Consulting Group and the Semiconductor Industry Association estimated it would take more than US$1 trillion over 10 years for the US to achieve “complete manufacturing self-sufficiency” in chips.
Chinese President Xi Jinping has plans to invest US$1.4 trillion through 2025 in key technologies including semiconductors, and appointed a top deputy to lead the initiative.
Political tensions could disrupt the race, however. The Biden administration has signaled it will continue efforts to restrict China’s access to US technology - including that used in Taiwan’s foundries. More ominously, the US could face difficulties if it found itself cut off from them.
China has long claimed the island as a renegade province and threatened to invade to prevent its independence.