Why is there a chip Shortage

Why is there a chip Shortage

Why is there a chip Shortage has been a confusing questions asked by lots of industry experts and consumers. Many different sectors are experiencing difficulties as a result of the global shortage of semiconductors.

As a result of the rising demand for their products, manufacturers of personal computers, mobile devices, game consoles, automobiles, networking devices and industrial machinery are all rushing to purchase sufficient quantities of chips to incorporate into their products.

Investors who want to successfully manage this circumstance and avoid making a stock trade that could be troublesome would be wise to be aware of what is going on.

That starts with being familiar with the six root causes of this ongoing crisis.In few months coming, there will most certainly be a continued shortage of chips because demand is expected to remain at an all-time high level.

After reaching a total of $433 billion in 2020, the Semiconductor Industry Association predicted in December that global sales of semiconductor chips would increase by 8.4 percent in 2021.

This represents a significant increase given the size of the total population, as it is a significant jump from the growth rate of 5.1 percent between 2019 and 2020.

The strong demand for electronics, shifting business models in the semiconductor industry that created a bottleneck among outsourced chip factories, and the effects of the United States’ trade war with China that began under former President Trump are all contributing factors in the shortage of semiconductors.

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What is Chip Shortage is all About?

Why Is There a Chip Supply Problem? The lack of chips is a relatively straightforward issue. In a nutshell, the ever-increasing demand for computer chips has caused the supply to fall short.

As automakers and electronics companies continue to need a larger number of chips, semiconductor manufacturers simply can’t grow their businesses quickly enough to keep up.

A chip shortfall, also known as a semiconductor scarcity or chip famine, is a phenomenon that occurs in the integrated circuit industry when the demand for silicon chips exceeds the supply. Other names for this phenomenon include chip famine and chip shortage.

Why is there a chip Shortage

Many different sectors are experiencing difficulties as a result of the global shortage of semiconductors.

As a result of the rising demand for their products, manufacturers of personal computers, mobile devices, game consoles, automobiles, networking devices and industrial machinery are all rushing to purchase sufficient quantities of chips to incorporate into their products.

Investors who want to successfully manage this circumstance and avoid making a stock trade that could be troublesome would be wise to be aware of what is going on. That starts with being familiar with the six root causes of this ongoing crisis.

9 Causes of Chip Shortage you need to Be Aware of

You should be aware of these nine factors that are contributing to the chip shortage and I will be listing and explaining them below for you.

Below your questions on “Why is there a chip Shortage” has been answered.

1. The Intel’s big mistakes

Intel (INTC -2.57 percent), the world’s largest manufacturer of x86 central processing units (CPUs) for use in personal computers and data centers, experienced a chip shortage in 2018.

This was due to the fact that the company’s production of 14nm chips was negatively impacted by its difficult development of new 10nm chips.

When it made another mistake the previous year, which resulted in the delay of the launch of its new 7nm chips, it had not yet rectified that shortage.

Because of Intel’s blunders, more PC manufacturers have turned to AMD (AMD 2.59 percent), which has put a burden on the company’s ability to provide CPUs.


Taiwan Semiconductor Manufacturing (TSM -0.30 percent), the most advanced chip foundry in the world, produces the majority of AMD’s chips, as opposed to Intel, which manufactures its own chips with its own internal foundry.

AMD outsources the production of the majority of its chips to TSM. As a direct consequence of this, AMD’s expansion and increases in market share put further strain on TSMC’s operations before the pandemic.

2. Declining Memory Chip Prices

In the meantime, the cost of memory chips skyrocketed in 2017 and 2018, but they are expected to fall in 2019 and 2020 as a result of weak demand in the PC and smartphone sectors.

As a direct result of this, leading manufacturers of DRAM and NAND chips, such as Samsung, SK Hynix, and Micron Technology (MU -0.11 percent), reduced their production levels in advance of the pandemic.

3. The COVID-19 crisis

To summarize, the market was already in a precarious position when the epidemic broke out a year ago.

However, the pandemic momentarily hampered shipments of semiconductors at a time when global demand for new mobile devices, personal computers, and upgrades to data centers skyrocketed in response to remote work, online learning, and other developments that encourage people to stay at home.

The majority of chipmakers were able to recover from the initial disruptions they experienced, and TSMC was able to remain operational because its most advanced plants are located in Taiwan and were not impacted. Memory chip manufacturers, in reaction to the increased demand, immediately increased the output of their products as well.

However, the semiconductor industry was still unable to sate the demand of the market for new chips.

TSMC’s fabrication facilities have already been operating at greater than one hundred percent capacity for the past year, and the company only just made the announcement that it plans to spend one hundred billion dollars over the next three years to develop its business.

In addition, Intel recently issued a warning that the worldwide chip scarcity could continue for an additional two years and that finding a solution would need “immense” spending.

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4. Secular Tailwinds

Over the course of the last few decades, the demand for chips around the world has typically followed cyclical patterns.

The steady expansion of new technologies, such as cloud computing, 5G networks, and artificial intelligence services, is, on the other hand, fueling the development of a “super cycle” of chip improvements that may continue for a significantly longer period of time than a conventional cycle.

Chips are becoming increasingly necessary in increasingly connected devices, such as smartphones and autos.

Skyworks Solutions (SWKS -1.17 percent), a company that manufactures wireless chips for a diverse variety of industries, anticipates that each 5G smartphone will consume $25 worth of front-end processors, which is a significant increase from the average of $18 for 4G devices and just $8 for 3G devices.

In addition, Skyworks forecasts that by the year 2024, approximately three quarters of all automobiles will be equipped with cellular connectivity.

IHS and Deloitte estimate that the total cost of all electronic components in cars will account for 45 percent of the total cost of the vehicle in 2020, which is an increase from the mere 18 percent that this proportion accounted for in 2000, and it is possible that this ratio will continue to increase.

Before the pandemic, many chipmakers anticipated that this supercycle would considerably raise their sales; nevertheless, the epidemic accelerated many of those trends while temporarily halting their shipments.

This caught many of the chipmakers off guard. Because of this strain, it is likely that the global chip scarcity will continue for some time.

5. The Ongoing Tech War

Another serious matter is the escalation of tensions between the United States and China in the area of technology, which began under the administration of President Donald Trump and is continuing under the administration of President Joe Biden.

The U.S. has already levied sanctions against many prominent Chinese businesses, including SMIC and Huawei, amid national security concerns.

These sanctions are making the current shortage of advanced chips in China even worse.

But they are also encouraging the Chinese government to make significant investments in its domestic chipmakers in order to reduce its overall reliance on technologies developed outside of the country.

This could result in a messy decoupling of the Chinese and American markets.

6. More Challenges Ahead

The recent proposal by the Biden administration to spend $50 billion to enhance America’s chipmaking sector is unlikely to remedy the current chip shortfall. Despite this, the administration has made the proposal.

This is due to the fact that the majority of the world’s semiconductor market is still supported by companies based in other countries, such as the Dutch semiconductor equipment maker ASML (ASML -2.17 percent), TSMC of Taiwan, and Samsung of South Korea, which are all arguably more significant than the majority of the United States’ chipmakers.

Furthermore, multiple recent failures, such as a power outage at TSMC, a production pause at Samsung, and a fire at the Japanese auto chipmaker Renesas, all show the fragility of the semiconductor supply chain and its overwhelming dependency on offshore gatekeepers. In addition,

7. A Huge Demand for Consumer Electronics

The pandemic caused by the Covid-19 virus has increased demand for consumer electronics.

The initial wave consisted of individuals purchasing personal computers, monitors, and several other pieces of equipment in order to work or attend school from a remote location.

Then, beginning in the fall of 2013, sales of home entertainment devices such as gaming consoles, televisions, smartphones, and tablets began to skyrocket.

According to data provided by Gartner, sales of personal computers increased by 4.8 percent in 2020 to 275 million units, with over 10 percent growth over the holiday shopping season.

This marked the largest yearly gain in the personal computer industry since 2010, and it reversed a decrease that had been occurring for some years.

Even more gizmos than that did quite well in sales. The Consumer Technology Association, an American trade group, stated that the year 2020 was the most successful year on record with nearly $442 billion in retail sales revenue.

Furthermore, the Consumer Technology Association anticipates that there will be a significant demand for gaming consoles, headphones, and products related to smart homes in the year 2021.

All of these gadgets have a large number of chips, including not only the primary CPU, which can run tens or hundreds of dollars, but also a number of less expensive tiny chips that are used to control the display, manage the electricity, or operate a 5G modem.

According to Patrick Moorhead, founder of Moor Insights, a company that studies the semiconductor industry, “the current chip shortage all starts with the unprecedented demand for personal computers and peripherals as people all over the globe worked and attended school from home.” This statement was made by Moorhead.

Electronic sector titans who have announced record sales argue that the numbers could have been even more impressive if there had been sufficient supply.

Apple recently declared a record-breaking $111 billion quarter and then warned analysts that it was unable to match demand for its new iPhones due to a lack of available supplies.

Tim Cook, the CEO of Apple, quoted by Reuters as saying, “semiconductors are very tight.”

Last month, the CEO of AMD, which manufactures the CPU that is at the heart of both Sony’s and Microsoft’s new consoles, stated that the company anticipates shortages to continue at least through the first part of the year.

Su argued that there was a requirement for an increase in the sector’s total capacity levels.

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8. A Structural Change in the Semiconductor Industry

The shortage is highlighting a structural change in the semiconductor industry.

The term “fabless” refers to the fact that many of the most successful businesses in the semiconductor industry are now just responsible for the design of the chips and the technology that they include.

The fabrication of the chips itself is typically outsourced to third-party businesses called as foundries.

Companies like as TSMC in Taiwan and Samsung in South Korea are responsible for operating the foundries, and as it turns out, these companies were already producing chips at the maximum rate possible.

In the early days of the epidemic, businesses that reduced their order volume required to get back in line.

Manufacturers of automobiles are not in direct competition with high-tech companies for the same supply of chips.

Chips for automobiles often make use of more established methods of chip production; they do not require cutting-edge technology.

But the shortage isn’t just in the fastest chips — it’s in everything.

“The shortfall in the semiconductor sector is across the board,” said new Qualcomm CEO Cristiano Amon last month. “Not only leading nodes but legacy nodes,” the speaker said, referring to the technology used in chip fabrication.

Nowadays, automobiles are equipped with a multitude of minuscule chips, the majority of which are responsible for managing power.

A large number of microcontrollers are also used in automobiles.

Microcontrollers are able to operate typical automotive activities such as power steering. Or they can serve as the brain at the center of an information and entertainment system.

In addition, automakers frequently practice “just-in-time” manufacture, which means they try to avoid stockpiling additional versions of certain components.

“The issue is that even if that ten-cent chip is missing, you can’t sell your $30,000 automobile,” said Gaurav Gupta, a semiconductor analyst at Gartner. “The problem is that even if that ten-cent chip is missing, you can’t sell your $30,000 car.”

According to a statement made in the past by Bryce Johnstone, director of automotive segment marketing at chip designer Imagination Technologies, who interviewed by CNBC. “if the chip that powers the in-car dials or automatic braking delayed, then so will the rest of the vehicle.”

The automotive sector has recently come to the conclusion that it should have a lower priority than the electronic companies that are located at the foundries.

When compared to sales of chips for smartphones, which accounted for 48 percent of TSMC’s revenue in 2020, automotive chips accounted for only 3 percent of the company’s total revenues.

The tech industry known as “the volume people. They enjoy larger profit margins. They also never reduce the quantity of their orders, and they have long-term relationships with the foundries,” explained Gupta.

“Automobiles are unable to get back in line at this time since the OEMs did not anticipate the demand for automobiles reaching its peak quite so quickly.”

It is not a secret that the foundries are aware of the problem. TSMC, which recognized as the most advanced and significant foundry. Stated that it was attempting to assist the automobile manufacturers and stated that it would spend as much as $28 billion this year to improve its production capacity.

According to a statement issued by TSMC in the month of January, “While our capacity fully used with demand from every sector.” The company is “reallocating our wafer capacity to accommodate the international automobile industry.”

Chips designed specifically for use in automobiles referred to as “automotive-grade. ” and they “certified” against binders full of industry standards to ensure that they are long-lasting and dependable.

In a report that published one month ago, the consulting firm Trendforce, which focuses on the semiconductor business. stated that “it is more difficult for the industry to alternate move its production lines and supply networks abroad.”

9. Restrictions on Semiconductor Manufacturing

The United States government has placed restrictions on Semiconductor Manufacturing International (SMIC), the largest foundry in China.

These restrictions prevent SMIC from acquiring advanced chip manufacturing equipment and make it significantly more difficult for the company to sell its finished products to businesses with ties to the United States.

These restrictions were put in place during the time that former President Trump of the United States was in office.

According to Gupta, customers required to transfer their orders to other companies like TSMC.

SMIC officials recognized that the move by the United States has prohibited it from using its full capacity.

They made this admission when they indicated that geopolitical concerns would prevent it from seizing “this year’s rare market opportunity,” which was a reference to the chip scarcity.

Some businesses made the decision to begin storing essential chips well in advance of the deadline set by the United States, which resulted in the exhaustion of their production capacity in 2017.

For instance, according to a report by Bloomberg News, Huawei stocked up on essential radio chips in preparation for the restrictions.

As the Covid pandemic spread around the world, supply concerns were another factor that drove stockpiling.

The major memory chip manufacturer SK Hynix reported in July of last year that it had seen an increase in sales, which it attributed to “increasing worry about IT supply chain in general.”

There are certain companies that have been successful as a result of their chip stockpiling.

Toyota had announced that it does not plan to cut the rate at which it produces vehicles since it has a supply of chips that is sufficient to last for four months in the event of a shortfall.

The company’s earnings prediction for the full year increased by 54 percent.

What Kind of Opportunities Does This Scarcity Present for Investors?

As the shortage of semiconductors continues, investors should buy shares of essential companies such as ASML and TSMC, which will profit from the elevated demand for their products and services.

On the other hand, investors should steer clear of industries that chip-starved, such as the automotive industry.

Instead of Intel, which may continue to experience problems with research and development. As well as products for the foreseeable future, investors should focus their attention on fabless chipmakers. That better managed, such as AMD and NVIDIA.

Why is there a chip Shortage is no more a thing of concern as we have dealt with it comprehensively. If you still have questions to ask feel free to drop it in the comment box and we will attend to you as soon as we can.

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