We know there is a chip shortage, but WHY?

Can we just instill that 2020 ruined everything! From the performing arts to restaurants and healthcare, and now electronics. We have all heard there is a semiconductor chip shortage, but what does that mean? Also, how does that affect me? Quite a few industries are being affected, and it looks as though the shortage will take us into 2022 and possibly 2023. You may be wondering “why do I care?” Well, when there is a shortage, especially for something of value, everyone ends up paying in the end.

How did this happen? 

A lot of different variables came into play to cause the shortage, creating a perfect storm that will now cost the economy billions in lost revenue.

The world shut down, so did production.

• No one producing chips means there are no chips available. As businesses started to open back up, chip manufacturers jumped onto making chips, but by this time, they were already behind as a typical lead time for a semiconductor chip is 11-12.5 weeks.

The need for electronics increased.

• With everyone being sent home to shelter in place, the need to work remotely became a necessity, no longer a luxury. Work from home solutions needed to be implemented and implemented fast.

The future demand was underestimated.

• Manufacturers cannot tell the future (contrary to popular belief.) So, when it came to March 2020, manufacturers had not created any surplus of inventory, and so the inventory they did have ran out quickly causing the lead time now to increase to 15 weeks or more.

Silicon shortage due to vaccines.

• The silicon that is used to create the semiconductor chips is the same kind of silicon used to create the vials used for the vaccines. The vaccines take precedence over the manufacturing of the semiconductor chips adding to the chip shortage. 

Ok, with now understanding why there is a shortage, let us dive into who will be affected. Pretty much anything that runs off computing will be affected by this shortage in one way or another. Think of a day in recent weeks that you went a whole day without using something that was not in relation with computing electronics.

It is not just cell phones and cameras, or video game consoles, it is automotive, military, and general large-scale computing. Not just one industry will suffer from this shortage, all industries will, and the shortage will have a ripple effect. Increase in cost to manufacture chips will flow all the way down to consumers, with increases in costs for goods, and by goods, I mean ALL goods.

For example, a fruit juice manufacturing plant, who specializes in manufacturing and distribution of local and exotic consumer fruit juices, now has most of their staff working from home. 

For example, a fruit juice manufacturing plant, who specializes in manufacturing and distribution of local and exotic consumer fruit juices, now has most of their staff working from home. To make sure staff are equipped appropriately, they purchase hundreds of laptop cameras and microphones. Also, the company needed to increase their server sizes and locations since staff will be remote. The hardware purchased has increased in cost due to the chip shortage, and now the fruit juice manufacturer must increase their product prices to assist in covering all these costs. The consumer now must pay extra per juice purchase all because the semiconductor chips are in short supply.

What is being done about this? Production has started back up and chips are being pumped out as fast as possible, but it is not as simple as hiring more people to build more chips. Certain supplies (such as silicon) that are used to make the chips are in high demand, and the plants that make the chips can only produce so much at a time as the chips are highly labor intensive and attention to detail is of utmost importance. If a semiconductor chip is being placed into a car, and the chip is faulty, it could lead to the vehicle malfunctioning that could potentially cause harm to the driver.

So, when you are grocery store shopping, and you notice that the price of your favorite food has gone up, think about how a shortage in semiconductor chips could be the direct cause.