• Geyang SUN

"Chips are the new oil" and we have a serious shortage.

Updated: Apr 29, 2021

South Korea and Taiwan are now referred to as the new OPEC while carmakers need to suffer billions of lost revenue since chips are nowhere to be found. In this article, we will untangle the causes of this shortage and its future developments.

What shortage are we talking about?

Microprocessors are produced from semiconductor materials, and they are the heart of any electronic device, from iPhone to fridges, from Tesla to planes. Almost everything that has electricity nowadays needs one or more chips.

Last year, 1 trillion microprocessors were produced worldwide, which means 128 chips per person; we can conclude that if the world runs on software, it surely runs on the chips.

Like what we are experiencing right now, a chip shortage impacts multiple aspects of our life. Particularly it prohibits access to sophisticated high-tech products and we see the sold-out of the PS5, the underproduction of electric vehicles, etc.

According to Goldman Sachs, this shortage is already affecting 169 industries, most of which will witness a slow-down in manufacturing; altogether it is projected to impact the US GDP by -1% alone negatively.

How has it happened?

In 2000, there were 30+ manufacturers globally, but globalization led to a Taylorism-like spread of the value-chain with the implementation of Just-In-Time practices. This specialization in value-generating activities and outsourcing the rest are commonplace among all the players in the market. So today, we have hundreds of chip designers but only 3 main manufacturers in the industry: Intel(US), Samsung(S.Korea), and TSMC(Taiwan).

Companies over-relied on those producers or the so-called foundries by shortening their stocks to maximize profit, so when the Covid-19 pandemic hit, there was just not enough infrastructure to adapt and meet the demand of new consumer habits.

One of the causes was the misjudgment on how fast the recovery would be for the automotive industry. In fact, in March of 2020, many carmakers have cut their chip orders. Still, when they went back to their suppliers after a few months, they found themselves competing with other chip-intensive industries like smartphones, domestic appliances, and bitcoin miners.

General Motors and Ford CEOs have already warned that they might take a combined 4.5bn $ hit due to the shortage.

The consulting firm AlixPartners says that automakers will produce 1.5 million to 5 million fewer vehicles worldwide

What's for the future?

The acceleration of digitalization, mainly thanks to the pandemic, has given us a warning about the immense amount of microprocessors we need. Furthermore, technologies such as 5G and IoT are just waiting for better chips to be made and distributed to better connect devices and people.

President Joe Biden partecipated in the CEO Summit on Semiconductor and Supply Chain Resilience. 12/04/2021

To respond to this crisis, U.S. President Joe Biden has already planned 300m $ in its American Job Plan, destined for infrastructural development focused on the semiconductor supply chain. This is a further effort to shorten the supply chain from Asia (at the moment, it supplies 80% of the world demand) to Arizona in the US.

The shift from Asia is not only a pandemic-related concern.

Surely chips have become the Key Success Factor of a country at the same level as petroleum in the 70s or gold in the colonial era. Hence, having a steady supply which is pandemic proof is the right intuition. Still, this displacement of the production barycenter is also because semiconductor is now a geopolitical flashpoint between the West and China.

Consequently, the US administration wants to move its strategic partnership with TSMC and Samsung in the US, far from any geopolitical sparks in the South China Sea.

To conclude, we may need to face this shortage still for a couple of years, till when TSMC and Intel deploy their new manufacturing plants at full capacity. In the meantime, we may face an increase in the price of the iPhone, and PS5 will continue its sold-out status on Amazon.

Geyang SUN for ESCP Biztech Society.

Paris, 29th April 2021





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