Computer chips are everywhere. There are dozens in every car, helping regulate engine temperatures and stabilise suspension systems. They manage water treatment plants, power lines and internet cables. Almost any product that plugs into a wall now carries a tiny computer inside. The modern world runs on them.
And now there's not enough of them. Here's what you need to know about a perfect storm of factors that are pushing up prices for consumers and cutting profits for some of America's biggest corporations.
What exactly is a semiconductor?
A computer chip, also called a semiconductor or integrated circuit, is a series of electronic circuits printed onto a conducting material, usually silicon. They form the physical building blocks used to make computers and run software. Over the years, chip designers have managed to squeeze more and more circuits into smaller spaces, making computers exponentially faster and cheaper. But the tiny size and complex design laid the groundwork for the current shortage.
Why don't the chip companies just make more?
Unlike car engines or toys, chips need to be built in factories with highly controlled environments, known as "fabs." Specks of dust, temperature spikes and even static electricity can damage the intricate workings of semiconductors. Meeting unexpected demand isn't as simple as setting up another production line and hiring a few more workers. New chip fabs cost billions of dollars and can take two years to build. Right now, fabs are running at full capacity, but it will take months or years before new ones come online to fill the extra demand.
What role does the pandemic play in the shortage?
When the pandemic started shutting down parts of the global economy last year, most economists thought consumer spending would drop off a cliff as people lost their jobs or stopped buying non-essential goods. Auto companies cut back on production and ordered fewer of the chips needed to make their cars run. At the same time, millions of people forced to work or go to school from home poured money they may have otherwise spent on movie tickets or vacations into TVs, computers and video game systems. Electronics companies bought up all extra chips to meet that demand, and when auto companies realized people still wanted cars it was too late. Now, millions of cars are sitting in factory lots, nearly finished except for the computer chips they need.
What other factors led to the shortage?
The pandemic isn't the only factor at play. New 5G phones use a lot more computer chips than previous generations of handsets. About a quarter of all phones sold in 2020 were 5G-ready, so the industry suddenly put a massive new strain on chip production, said Matt Bryson, a semi-conductor company analyst with Wedbush Securities. Former president Trump's trade war with China also had an impact. About 10% of the world's chip production comes from SMIC, a semiconductor company that's partially owned by the Chinese government. In 2020, the U.S. government restricted American companies from selling to SMIC, citing its ties to the Chinese military. Even the demand for cryptocurrencies like Bitcoin is a factor. Warehouses full of computers used to run the extremely complicated calculations that make cryptocurrencies possible are chewing up more and more computer chips each year
Who's gaining from the shortage?
It's not as straight-forward as you may think. Chip companies are benefitting from being able to sell at higher prices, but for the most part they are locked into large, long-term deals that can't be changed on a whim. The biggest winners may be the companies that make the expensive and highly complex manufacturing equipment used to make semiconductors, such as California-based Applied Materials and Lam Research, and Japan-based Tokyo Electron.
Who's paying the price?
Consumers. Because of how ubiquitous chips are, prices are going up for all sorts of products. Some high-end computer and gaming components are selling on auction sites like eBay for double their retail prices. Waiting times for new PlayStations and Xboxes may get pushed out further. Many people could find a new car falling just out of reach. "The consumer is a clear loser in this situation," Bryson said.
What happens next?
The shortage could last for a while, partly because of how long it takes to get new fabs online, but also because demand likely won't slow down, especially as economic activity picks up again through 2021. The shortage is amplifying calls from some U.S. politicians for government to subsidize a stronger home-grown chip industry so American companies don't need to rely on Chinese and Taiwanese manufacturers. In China, the trade war has prompted the government to stockpile chips and find new sources for components. Even after the pandemic is over, geopolitics will keep roiling the chip industry.
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Author: Washington Post. Article originally published on iol.co.za.
