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Is there an Answer to the Ongoing Global Chip Shortage?

chip shortage

With higher demand for cell phones, laptops and the increased use of internet, demand for semiconductor chips has increased tremendously. But new vulnerabilities have emerged in the global semiconductor supply chain, with the industry now facing an even greater shortage of semiconductor chips. This has raised the question that if there is an end to this ongoing crisis. According to a recently published report by Semiconductor Industry Association (SIA) and Boston Consulting Group (BCG) that highlights the challenges of the chip shortage explains how this crisis can be addressed by government actions, including funding incentives to boost domestic chip production and research and the way forward.

Semicon’s supply chain problem

According to the report, the highly specialized global semiconductor supply chain has supported the industry’s continuous technology innovation, benefited consumers, and delivered enormous value. But most operate within a very specific niche, giving them significant influence over their domain. This results in a supply chain that is indeed dangerous, geographically speaking. As the report says, there are more than 50 points across the supply chain where one region holds more than 65% of the global market share.

“About 75% of semiconductor manufacturing capacity, as well as many suppliers of key materials — such as silicon wafers and other specialty chemicals — are concentrated in China and East Asia, a region significantly exposed to high seismic activity and geopolitical tensions. Furthermore, all of the world’s most advanced semiconductor manufacturing capacity — in nodes below 10 nanometers — is currently located in South Korea (8%) and Taiwan (92%). These are single points of failure that could be disrupted by natural disasters, infrastructure shutdowns, or internal conflicts, and may cause severe interruptions in the supply of chips.”

There have been numerous examples of such failures in the recent months. The December earthquake that shut down two Micron fabs in Taiwan and the February storm that shut down a Samsung fab in Texas are cases in point. Those incidents have already resulted in supply issues for flash memory, in Micron’s case, as well as SSD controllers in Samsung’s case and these in turn affected the entire semicon industry.

Is true self-sufficiency attainable?

The chip shortage has prompted governments around the world to question their reliance on this global network. The European Commission said that it planned to invest $170 billion to increase its production. Also, the U.S. President Joe Biden ordered a review on critical supply chains in February. Further, China has worked towards attaining independence and enjoyed a series of wins. In recent months, it announced its first DDR4 memory, first domestic SSDs, and first 7nm data center GPU; it’s also made progress on a chip fabbing tool.

Some believe, a hypothetical alternative with fully self-sufficient local supply chains in each region would require at least $1 trillion in incremental upfront investment and result in a 35% to 65% overall increase in semiconductor prices, ultimately resulting in higher costs of electronic devices for consumers.

Yet true self-sufficiency is nearly unattainable, as the BGC report estimated that “the industry will have to almost double its capacity by 2030 to keep up with the expected 4% to 5% average annual growth in semiconductor demand.” That would make self-sufficient supplies even more costly.

The way forward

SIA and BGC proposed an alternative solution to fully self-sufficient supplies for major regions, including targeted investments. They called for the U.S. to implement a $20 to $50 billion program that would support domestic production of semiconductors used in devices critical to national security and other vital areas.

“The governments with significant national security concerns related to control over semiconductor technology should establish a stable framework for restrictions on semiconductor trade” that clearly defines policy goals, restrictions, and “the expected second-order impacts on industry players” that could result.

The report also calls for a level global playing field for domestic and foreign firms alike, as well as strong protection of intellectual property rights. Promotion of global trade and international collaboration on R&D and technology standards, investing in basic research, STEM education and advancing immigration policies that enable leading global semiconductor clusters to attract world-class talent will improve the situation.

It is also extremely important to establish a clear and stable framework for targeted controls on semiconductor trade that avoid broad unilateral restrictions on technologies and vendors. As John Neuffer, SIA president and CEO opines, “The global semiconductor shortage is a stark reminder of the risks of supply chain disruptions and the need for the U.S. government to take swift action to invest in domestic chip manufacturing and research.”

As the chip shortage issue cannot be solved overnight, the industry players and policy makers should significantly step up the efforts to address the looming shortage of high-skill talent that threatens to constrain the semiconductor industry’s ability to keep the current pace of innovation and growth.

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Sohini Bagchi
Sohini Bagchi is Editor at CXOToday, a published author and a storyteller. She can be reached at sohini.bagchi@trivone.com