Chip shortage crisis

At first glance, the current chip shortage may appear to be a relatively simple supply and demand inequality problem, albeit affecting every industry including automotive, industrial equipment, electrical equipment, hardware and consumer electronics, and even household appliances. Lead times are extended, some new releases are being delayed or cancelled, and products are costing more to manufacture.

Chip demand by revenue in 2020 (US$ bn)

Pie chart showing impact of chip shortage | Workz Group

“The crisis may actually be the greatest shock to supply that the semiconductor industry and its customers have ever seen.”
Jim Farley, Ford CEO

Far from a short-term issue, this chip shortage crisis is likely to persist for years rather than weeks or months, and the sense of urgency is only just emerging. Additionally, trying to understand and remedy the short-term crisis has shone a light on some of the more fundamental flaws in the overall industry supply chain.

Richelle Wiley, COO of Workz Group, explains how and why the current situation arose, the impact on telecoms operators, how they can adapt, and the longer-term market outlook.

How did we get here?

It is doubtful any industry could weather this unprecedented ‘perfect storm’ of circumstances. To use the management textbook classic, all the PESTLE columns can be populated. Social issues arose in the form of the pandemic, although this is not solely to blame, with many manufacturing facilities already operating at close to capacity before having to temporarily shut down. 

Political tensions erupted between leading chip manufacturers, most notably the US and China. Legal repercussions rapidly followed. Environmental issues have included natural disasters and weather conditions disrupting production, and hence supply, throughout the world, from a Texas freeze causing blackouts in semiconductor factories to a Taiwanese drought disrupting the TSMC factory which requires copious amounts of water to cool wafers during production, to a fire at the Japanese Renesas factory.

Economics are involved, with continued demand for all types of consumer devices. Technological advances with the Internet of Things, remote working, increasing AI and automation, to name but a few, have led to an increasing demand for silicon chips.

Is there a chip crisis?

Yes, it is real and it is huge, demonstrating our clear reliance on semiconductors across all industries, from car manufacturing to consumer electronics. Car manufacturers including Ford and Subaru are suspending or delaying manufacture, Samsung’s production of televisions and home appliances has been disrupted, and even the world’s biggest semiconductor buyer Apple delayed the release of its iPhone 12 by two months.

Semiconductor manufacturers by market share 

Pie chart illustrating chip shortage | Workz Group
While many companies develop chips, not many actually manufacture them, and TSMC alone is responsible for more than half of the world’s chip supply. Chip manufacture is capex-intensive, and the business is not configured to just ‘turn up the volume’ as needed. Chips may appear commoditised but require highly complex engineering: a semiconductor wafer needs 1400 steps and a chip takes 26 weeks to make, says the Semiconductor Industry Association. Lead times have reached 15 weeks, according to Bloomberg, and semiconductor vendors are now allocating far fewer chips than needed by their customers.

Chip lead time: before and after COVID 

Bar graph tracking chip shortage | Workz Group

How are telecoms operators impacted?

Here at Workz, we are seeing first-hand a variety of ways in which telecoms operators are experiencing and realising the magnitude of the problem and its implications for both price and supply. While some operators were previously unaware of the chip crisis, they are now realising there is a problem albeit they are perhaps not yet fully aware of its extent. In these instances, we are continuing to coach and provide more information to help customers understand more about the situation to ensure they can make fully informed decisions. As price increases are reluctantly accepted, the magnitude of the situation is becoming clearer, and some operators are now apprehensive as to whether they will be able to gain access to new stock.

One key point to highlight is that the telecoms industry is having to compete for supply with bulk buyers from a vast range of other industries, such as car manufacturers and smartphone developers, which buy billions of chips, and, consequently, mean cost increases are inevitable. The problem risks being further exacerbated by overordering and hoarding supplies, which in turn puts more strain on the supply chain, through this false surge in demand.

Everyone’s taking a hit 

Glass front store with Apple logo illuminated in centre | Workz Group

What should telcos do?

In addressing concerns of increasing price and stock outs, we recommend some specific actions for operators to minimise end user impact in the short term and achieve tangible operational benefits. These include reviewing product specifications and qualifying additional modules to have access to more tested chip options that are fit for requirement, and building inventory banks for up to 4-6 months of supply due to expected delays. We also recommend working together with us as we offer guidance to help you develop advanced demand planning strategies and capabilities to ensure stock outs are avoided and products always remain in supply.

Our recommendation

Infographic showing effective demand planning | Workz Group

When will the problems end?

Gartner anticipates that the chip shortage will continue until Q2 2022. Flex, Infineon and Intel anticipate that problems will continue until 2023 or even longer. There are indications of longer-term market plans with government support being sought across all continents but establishing a facility is complex, time-consuming, and expensive. Europe’s manufacturing contribution is endeavouring to grow from 10% to 20% of the global market, funded partly by The European Commission, CNBC reports. 

According to Reuters, Intel has pledged $20 billion investment in Europe alone, and according to the Semiconductor Industry Association, it is seeking governmental support to do so. The Japanese government has announced details of a $340 million TSMC chip development project. China, which has previously been heavily dependent on importing semiconductors, is investing in increasing self-reliance through manufacturing its own chips. 

In the US, Intel is building two new factories in Arizona, and the US government has announced initiatives to support domestic chip production, including a $52 billion funding boost pledge.

What will the longer term bring?

Over time, the supply and demand equilibrium will reassert itself, supported by increasing investment in production throughout the world, and there should be positive changes benefiting the market as a whole. In the interim, we continue to work with our customers and develop initiatives to ensure there are sufficient SIMs in stock. If you would like to know more, please get in touch with your account manager today.

Other people's views

  1. Is there a possibility to recycle and reuse the chips? I am sure with increase demand of electronics items, laptops, cell phones, the old one must be returning back. Can the chip inside that be reused or recycle and is this significant enough to take care of the supply shortage ?

  2. Thanks for your comment, it’s a good point. As with the recycling of most materials, we’ve still got some way to go when it comes to recycling silicon chips. The recycling of the silicon chip specifically is more complicated and costly than the traditional recycling process as they are very small in size and extracting precious metal from them can be extremely difficult. As a result of this and relatively small volumes, there are a limited number of companies such as AWA Refiners (UK) offering this service today. As production and usage of the silicon chip grow at an exponential rate, research into more sustainable materials such as biodegradable silicon is critical to having a sustainable, cost-effective solution that is available to every device user.

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