I recently decided to upgrade my laptop of six years. The old workhorse was now showing its age. I needed something more capable to meet my evolved needs. So I did my time: hours of online research; youtube reviews, and product comparisons. When I found a product that ticked all the boxes, I did the needful, parting with my card details to seal the deal. Before placing the order I noticed a striking piece of information on the site. The shipping (not delivery) date would be at least two months out. Sobering!
Since the pandemic began, I’ve heard of strained supply chains but never had to deal with it. Not anymore. With this purchase came a reckoning that piqued my interest, causing me to probe into the supply chain, and to unpack why chips are all the rage lately.
Here’s what I learned.
What is a Microchip?
You’ll know that the microchip (also known as the chip or semiconductor) is what gives computers and modern devices their “smarts.” But what’s not as obvious is the bleeding edge technology that enables this to happen. Although the modern microchip is barely the size of a fingernail, its integrated circuitry can span several kilometres in length – a feat of precision engineering. In essence, the details of the circuits on modern chips are so small that they’re invisible to the naked eye. It’s called atomic-level manufacturing.
Cramming these complex circuits into such a small area requires high-end capabilities and large capital outlays. Surprisingly, some of the most recognisable tech brands (like Microsoft) generally don’t have these production capabilities. Thankfully, not everyone needs to have them.
The Industry
The i5 processor chip that would power my new laptop is both designed and produced by Intel, a feat that places the US semiconductor titan in a special class. That’s because, in this complex and fragmented industry, it’s extremely rare for one company to boast of having both design and production capabilities. But even with this much control over its value chain, Intel is only able to cater to a fraction of the market. Here’s why.
There are different types of chips, each suited to a unique need. Intel specialises in microprocessors that PCs, laptops and servers run on. Other categories include memory chips for storing data, graphic processing units for rendering images, and standard chips that perform simple utilities to name a few.
You may be wondering, why not just switch from producing one chip to producing another type when the need arises? That’s a valid question but there’s more to consider. Given the sheer level of specificity in product design, the switching costs involved are simply prohibitive. This is why chip manufacturing (aka fabrication) is a game of very few elite players. Even the most dominant PC brands outsource chip production. The leading player here is by far Taiwan Semiconductor Manufacturing Company (TSMC). As a dedicated chipmaker, TSMC produces chips for smartphones, PCs, automotive, IoT devices and consumer electronics.
This delicately balanced supply industry had been running more or less in sync with global demand until recently.
Why The Shortage?
The reason why there’s a global shortage of chips today has to do with human judgment and some misfortune.
When the pandemic hit, stock markets experienced an epic nosedive, plunging economies around the world into a period of brief recession. This led businesses to tighten their spending, anticipating a prolonged recession. Things turned out differently. People needed more of the products that run on chips to adapt to their evolved work and home lives.
Other factors that have exacerbated the shortage include early stockpiling of chips by some consumers, chip production outages due to weather and (of all things) fire, and increasing costs.
All these inconveniences layer on top of extremely intricate supply chains that span multiple regions. Last month, in an article titled “Why is there a chip shortage?,” the BBC concluded that the pandemic accelerated an already precarious situation for chipmakers. The effect of a strained chip supply has been amplified through supply chains in the industries that rely on it.
Broader Concerns
Evidently, nobody wants to be in a precarious situation. The shortages have highlighted the role of chips in our world today and exposed how reliant we are on them. Perhaps most spectacularly, carmakers have lost out on sales, with consulting firm Alix Partners estimating that loss to be in the region of $110 billion globally.
This dependency on chips has created some eagerness in the US to build up its chipmaking capacity. Earlier this year, US president Joe Biden is reported by the New York Times to have issued an executive order requiring his administration to review critical supply chains with the aim of bolstering American manufacturing of semiconductors.
But it’s not only the US that’s interested in chip manufacturing resiliency. According to abc news, Chinese President Xi says the country will spend more than $1.3 trillion on high-tech industries with a particular focus on semiconductors. Indeed semiconductors have been a recent focus in the ongoing trade tensions between US and China.
Efforts on either side to build chipmaking capacity will not yield any significant results in the near term. According to Time magazine, bringing leading-edge semiconductor manufacturing to the U.S. will take years. This is an indication of the lead times needed to realise investment gains in this complex sector.
Final Thought
For the miniature marvels they are, microchips are far mightier than their humble size may suggest. They’ve brought governments and consumers to a place of reckoning.
The chip shortages have forced me to reflect on other things we rely on, like food, clean air and electricity. So many things need to work properly for us to have the normalcy our lives run on. The biggest lesson I’m learning here is gratitude.
I’m still waiting on my laptop purchase. Estimated delivery is at least a month away. Thankfully, it’s not an urgent need for me, and I can afford to wait.
