The story so far: In October, Intel’s chief executive Pat Gelsinger, ahead of the company’s third quarter earnings, said he expects the chip shortage to extend until at least 2023. The company’s rival, AMD, was a bit more optimistic. At last year’s Code Conference, CEO Lisa Su said the situation will likely remain ‘tight’, and would gradually get better in 2022 as more production capacity opens up.
The two CEOs predicted the supply of chipsets based on the pandemic’s effect on a component that has become a life-line for most gadgets we use every day. Now, the ongoing conflict between Russia and Ukraine is worsening the global chip shortage crisis.
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. People switched to work from home, children connected to schools through laptops, and get-togethers happened over video calls. This shift led to a surge in demand for laptops and tablets.
The stay-at-home rules also made several people pick up console-based gaming. According to a report by data analytics firm NPD Group, overall total consumer spending on video gaming in the U.S. totalled $13.3 billion in the September ending quarter of 2021, an increase of 7% when compared to the same period in 2020, and the highest third quarter spend in history.
These devices in high demand run on thumbnail-sized semiconductor piece (or pieces some time), 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 the 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?
According to a report by Moody’s Analytics, Ukraine supplies rare gases used to produce semiconductor fab lasers, and Russia exports rare metals like palladium to make semiconductors. This combination is required to build chipsets that power a range of devices, from automobiles to smartphones.
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 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 the silvery-white metal.
Russia and South Africa are the two largest producers of palladium. In 2021, Russia supplied 2.35 million ounces (66 million grams) of palladium, according to precious metals refiner Heraeus. 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 the metal is a key to make 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 into 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 chip sets.
How are businesses and governments adapting to these changes?
The global semiconductor market is projected to grow by 8.8% to US$ 601 billion, driven by a double-digit growth of the sensors and logic category, according to data from World Semiconductor Trade Statistics (WSTS).
And with the recent trends in electric mobility, automotive safety, and Internet of Things (IoT), the demand for semiconductor 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 also fewer governmental restrictions when production is held onshore. There are also 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.
The U.S. government is looking to pass the CHIPS Act, a law that would provide semiconductor firms with $52 billion in subsidies to advance chip making in the country.
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.