If you were hoping to get your hands on a new smartphone, or pondering whether to renew your PC, you might want to think again: according to research firm Gartner, the global chip shortage that is hitting a number of sectors isn't set to subside before well into 2022.
Severe semiconductor shortages will persist throughout 2021, with recovery only starting towards the end of the year to reach normal levels from the second quarter of 2022 onwards, says Gartner. By that time, new manufacturing capacity will help ease the situation.
Meanwhile, however, the time it takes to produce a chip could increase by six months, and even up to a year for more specific semiconductors. Key devices to be impacted will include power management chips, CMOS image and touch sensors, as well as fingerprint sensors and microcontrollers.
Gartner identifies a number of reasons that explain the current shortage. The first one is geopolitical: with tensions between the US and China escalating in recent months, Chinese tech companies have been stockpiling record amounts of chips and chip-making equipment.
SEE: Hiring Kit: Computer Hardware Engineer (TechRepublic Premium)
At the same time, some key semiconductor manufacturers had to temporarily suspend production. In Austin, Texas, Samsung shut down a chip plant for more than a month because of power outages arising from blistering cold weather; and in Japan, Renesas recently paused production following the outbreak of a fire on-site.
Still, the situation could have been manageable – had a global pandemic not prompted consumers and businesses around the world to frantically buy new devices to remain connected to friends, families and colleagues while the health crisis locked entire populations inside their homes for months on end.
Shipments of PCs, tablets and gaming consoles soared in the past year; while smartphone sales didn't pick up as fast, it is expected that consumers will be keen to switch their handsets to 5G-enabled devices in 2021, and demand for mobile phones is set to skyrocket in the coming months.
All those devices are powered and controlled by semiconductors, and in fact, chip sales grew to a mammoth $464 billion in 2020, an increase of 11% compared to 2019.
At first glance, the numbers seem to reflect a healthy and thriving industry. But in reality, semiconductor manufacturing facilities – typically called "foundries", or "fabs" – are struggling to cope with such heightened demand, and the pace of production is rapidly falling behind.
THE CHIP SUPPLY CHAIN: A GLOBAL JOURNEY
The semiconductor supply chain is an unusual one. Some companies, like Intel, design and manufacture their own chips, and as such are known as Integrated Device Manufacturers (IDMs). Others, like Nvidia, only design semiconductors without manufacturing them: they are called "fabless".
And then, there are companies that run fabs where anybody and everybody can place an order. This is the case of a handful of companies, the most established of which are Samsung and TSMC.
"There are a couple of very big IDMs at the moment," Alan Priestley, Europe semiconductor analyst at Gartner, tells ZDNet. "But most of the industry relies on the use of foundries, and the reason this has happened is because it is massively expensive to build semiconductor manufacturing facilities."
Intel is an exception, says Priestley: through continuous investment, the company has managed to establish itself as a major chip designer and manufacturer. But for the majority of businesses, it is still necessary to delegate semiconductor manufacturing to external foundries.
Foundries take on the front-end aspect of the chip-manufacturing process. Based on different chip designs, nanometer-scale integrated circuits are printed onto silicon wafers; the wafers are then sent to the next stage of production, where they are sliced into individual finished semiconductors, before being assembled and packaged into electronic devices, and tested.
There are up to 1,400 steps in the overall manufacturing process for semiconductor wafers; it can take as long as 20 weeks to complete advanced chips, and fabs can use as many as 300 different types of materials throughout fabrication.
"It's almost impossible to start chip manufacturing from scratch," says Priestley. "This is why we are seeing industry consolidation: it has become so difficult and expensive to do, that companies just couldn't afford to do it on their own."
Specifically, companies have largely been outsourcing the manufacturing process to two companies – Samsung and TSMC. As a result, about three-quarters of the world's total semiconductor manufacturing capacity comes from China, Japan, South Korea and Taiwan.
What's more, virtually all of the world's advanced semiconductor manufacturing capacity – in nodes below ten nanometers – is located in South Korea and Taiwan.
Any supply chain that is so highly dependent on trading with a select number of companies located in one region inevitably comes with vulnerabilities. Geopolitical tensions, factory shut-downs, major changes to the balance of supply and demand – or, in this scenario, all three at the same time – are bound to hugely disrupt the entire system.
"Companies like Apple, Nvidia, AMD, and a huge range of other companies, are dependent on Samsung and TSMC's manufacturing capacity," says Priestley. "And now, there is not enough capacity."
Gartner's new analysis anticipates between six and 12 months of lead time for wafer delivery in the coming months; this in turn means that electronic device makers that need semiconductors will struggle to deliver products to their customers. Shortages will extend to various markets, forecasts Gartner, including PC, wireless, data processing, and consumer segments.
In fact, consumers are noticing the impact of the chip shortage. Gamers are struggling to get their hands on consoles, and those who will have shopped for PCs or smartphones recently are likely to have been faced with extended delivery times.
Economists are warning that the shortage is trickling down to many other devices, ranging from smart doorbells to basic home appliances like microwaves or refrigerators. The automotive industry has been especially hit, and car production lines have in some cases been temporarily suspended.
With semiconductors now a major part of the economy, a global chip shortage is likely to have far-ranging and unpredictable ramifications. "For example, for products that have a very high chip content, like PCs or phones, we are likely to see configuration changes," says Priestley. "Where you previously had something with 16 GB of memory inside, it might only have 8 GB now."
ACHIEVING SEMICONDUCTOR SOVEREIGNTY
Unsurprisingly, chip manufacturers have already pledged to increase capacity: TSMC plans to spend $100 billion over the next three years on new fabs, Intel is splashing $20 billion on two new factories that will also supply semiconductors to other companies, and SK Hynix has also pledged to increase spending on chip production equipment this year.
But the shortage also seems to have triggered a wake-up call among governments, who are increasingly discussing concepts of semiconductor "self-sufficiency". With chips now key to products ranging from military equipment to telecoms infrastructure, it is easy to see why such heavy dependence on East Asia for steady supply is a reason to worry.
In the US, for instance, the Biden administration has promised to take "aggressive steps" to tackle the current shortage, and to increase funding for domestic chip-manufacturing incentives.
The government has the support of industry: tech giants including Amazon, Cisco, Google, Apple, Microsoft and HPE have joined forces in a newly founded Semiconductors in America Coalition (SIAC), warning that the US is at a competitive disadvantage when it comes to building fabs. SIAC is calling for no less than a $50 billion investment to fund the expansion of the country's manufacturing capabilities.
In a similar vein, the EU is aiming to produce 20% of the global supply of semiconductors by 2030. In recent meetings with representatives from TSMC and Intel, EU Commissioner Thierry Breton reiterated the bloc's ambition to rebalance the global chip supply chain, and to lead back on semiconductor production to protect the region's national security interests.
- Cisco boss expects global chip shortage to continue another six months
- Juniper Q1 and outlook top expectations even as global chip shortage weighs
- AMD sees another six months of video game chip shortages
Costs, however, are likely to be prohibitive. According to SIA, a state-of-the-art semiconductor fab of standard capacity requires between $5 billion and $20 billion of capital expenditure. Put differently, achieving complete manufacturing self-sufficiency in the US would require over $400 billion in government incentives and cost more than one trillion dollars over the next ten years.
Ultimately, the semiconductor supply chain is too complex to be limited to one country, and is likely to remain global. From chip design to wafer processing and testing, through materials supply, and assembly and packaging – the ecosystem is too large to make complete self-sufficiency a realistic prospect for any one country.
"Even if huge amounts of money are thrown at fabs, it doesn't solve the problem," says Priestley. "The supply chain is massively complex. It's one thing to do one part of the story, but you also have to do all the rest of the story."
This doesn't mean that the semiconductor supply chain shouldn't be diversified. In fact, SIA estimates that the $50 billion boost proposed by the Biden administration would be a good place to start, enabling the construction of 19 advanced fabs and ensuring that the US can meet domestic demand for chips used in national security systems, aerospace and critical infrastructure.
The next few years are likely to see foundries popping up in new regions of the world, therefore, as companies and governments ramp up their efforts to mitigate the geographical risks tied to the supply of semiconductors. In the meantime, you might just have to endure the waiting lists, and probably settle for a few less gigabits of memory in your next handset.