The Global Chip Shortage and Rising Costs

Semiconductors. They’re used in everything from washing machines to modern cars, from computers to mobile phones. So when there is a significant downturn in the supply of silicon around the world, the ripple effects are almost incalculable.

In this piece, we’ll highlight how the global chip shortage has impacted some of the world’s biggest industries, and what that means in terms of rising costs and the way business and manufacturing will get done in 2021.

What Caused the Global Chip Shortage?

A combination of unfortunately timed events, combined with a global pandemic, brought chip production to its knees:

● Covid-19 caused a slump in the traditional purchasing markets for semiconductors such as cars, restaurant point of sale systems, and appliances. As a result, fabrication plants shifted their production to the only things that were selling: Laptops, tablets, and smartphones.
● The U.S. trade war with China has raged on through two administrations. A combination of restrictions, sanctions, and tariffs left both sides hurting economically. But more important to the topic at hand, the trade war reduced the availability and priority of silicon chips to U.S. companies, and impacted the bottom line of the chip companies as well.
● Record low backstocks combined with factories pre-selling out their capacity meant that there wasn’t much of a buffer in place when workers started to conduct Covid-19 all over Taiwan, including within chip manufacturing, testing, and packaging facilities. Production crawled to a near-halt as health protocols were enacted.

Unlike the ‘resets’ caused by earthquakes and other natural disasters that threatened silicon mining supplies and the delicate semiconductor fabrication plants in the past, recovering from a combination of political and biological factors is proving to be a far less predictable scenario.

The Rising Cost of Semiconductors

Once the initial production runs of chips for mobile devices ran dry, just about every industry that relied on semiconductors was in the same boat. With factories only able to tool their production lines for a limited number of industries at any given time, reserving future supply became a strictly cash operation. This meant higher prices, with Goldman Sachs predicting up to a 3% price hike across all impacted industries.

This also meant that the auto industry, a fairly specialised and yet low ranking player in the semiconductor game, was forced to immediately scale back production. IHS Markit predicts that the production of 1.3 million cars and vans are at risk globally for every quarter that the silicon crunch drags on. Cars are often selling within 5% of sticker price, an unheard of scenario. Used car prices are up nearly 40% since the start of 2021. A global price increase of 8.4% has already been realised over last year’s pricing, according to the statistics tracked at JD Power.

The next industry to be hit was electronics, including computing devices of all kinds. Apple’s CEO Tim Cook and CFO Luca Maestri gave the bad news on a recent stockholder’s update: Supply constraints were crimping sales of iPads and Macs. They said this will cause a $3 billion to $4 billion revenue drop in the third fiscal quarter. Samsung also expressed concerns about the global chip shortage. Bloomberg reports that they’re considering delaying the next Galaxy Note launch because of it. This is a reflection of a general industry trend, which is likely to see prices go up in response to supply dipping so sharply.

Unexpected, Rapid Moves Towards Automation

Some industries were forced to lay off workers and lean more heavily on existing technologies, because the technology that would allow them to update their point of sales (PoS) systems was no longer available. Thousands of restaurant service jobs are now at risk because of the chip shortage, which will have a knock on effect on local economies.
Food businesses and small restaurant chains are converting over to mobile based apps that will allow customers to scan a QR code at their table, place their order online, and have the food delivered directly to their seat. The app keeps a running tab of what the customers order, and simply charges them automatically when they leave. This reduces the number of servers needed, and minimises person-to-person interaction. It was a move that would have been almost unheard of in some places, but seems far more acceptable in a Covid-concerned world.

Similar technology has been rolled out in supermarkets internationally. Using phones to scan barcodes on products, customers can keep a running tab of their purchases as they shop. Then they simply visit a special self-check lane and submit the results of their shopping to the checkout terminal. Human intervention is only required when alcohol or medicine pops up on the shopping list. The specialised hand scanners available in-store require PoS semiconductors, so the move towards mobile apps as stores continue to modernise seems inevitable. This will further reduce the need for the current number of humans working within supermarkets.

The Covid pandemic left people far more open to automating tasks in the food services industries than ever before. And fast food isn’t immune to the trend. Automated drive thru facilities, autonomous fast food delivery, and in-restaurant touch screen ordering are all being rolled out by major chains. This will reduce the need for human employees in those roles, and unless demand increases exponentially, will reduce the percentage of the human workforce in those industries.

In the short term, this could mean many fewer consumers in the workforce, and a complete rethinking of topics ranging from unemployment benefits, to universal income programs, to unionisation trends, to right-to-work laws and policy.

Final Thoughts

The global chip shortage is impacting production and costs on the business side, as well as transportation costs, job availability, and income on the consumer side. It is a volatile time in several different industries. And the nature of the shortage makes short term solutions difficult, to say the least. The timing couldn’t be worse; people yearn for a return to normality as vaccines are rolled out internationally. Sadly, other factors will remain relevant that will increase costs and slow down full economic recovery in all semiconductor related fields for months to come.

Image Grey Mango/REUTERS/Jonathan Ernst TPX 

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