Shortage in ICs? How did it happen?

As you can imagine, COVID-19 stopped the economy in 2020, it paralyzed factory manufacturing capability. We had faced paused and then delayed ICs supply back then.

As we spent more time at home on quarantine, the reliance on electronics went deeper, which surged the demands on ICs, the market demands expected to manufacture more laptops, more TVs, more earphones.

The world’s biggest chips manufacturer: TSMC, Intel, Samsung all encountered the same issue with delayed ICs supply and unexpected demand increase.

 

Let’s take a look at the well-distributed structure in semiconductor industry.

It’s divided into 3 main areas: Design(Fabless)—>Manufacturing(Foundry)—>Testing and assembly. 

Of course, there are big players that do all by themselves, they are well-known companies such as Samsung and Intel, they are seen as IDM(Integrated Design and Manufacture).

So, how did the shortage happen in the first place? 

After the first wave of the pandemic, in the semiconductor industry, we started to face the overwhelming demands in ICs as people foresaw increasing demands as the economy bounced back. At the same time, the market was concerned that covid-19 would again stop the supply. More and more preventive orders flooded into manufacturers, which has worsen the situation given the already long lead-time orders.

But, not just that! As we enter the 21st century, everything is about ICs. 

We are more dependent on chips than we used to be, we rely on microwave to heat up food quickly, we rely on air filter to clean the air for our well-being, we manage lives with our mobile phones. All the devices require ICs to run. Can we possibility live without ICs? The answer is absolutely no.

Didn’t we already have enough suppliers in the market to manufacture ICs?

Not as many as you think.

Of course, as one of the main player in semiconductor, the US would try its best to secure the data security and domain knowhow. SMIC(foundry in China led by pioneers from TSMC) has been trying to own their foundry for decades, they have made huge progress on low-end chips, such as micro-controller in automotive. In 2020, Dec, SMIC has been added to Entity List by the US governement. Quoted announcement as follows: “Semiconductor Manufacturing International Corporation Incorporated (SMIC) is added to the Entity List as a result of China’s military-civil fusion (MCF) doctrine and evidence of activities between SMIC and entities of concern in the Chinese military industrial complex.” The action stops SMIC from using technologies developed by American companies in semiconductor production, even worse, they can’t purchase new equipment from ASML,tthe world’s biggest supplier in semiconductor equipment.

This kicked SMIC out of the game, it also forced its supply chains to seek alternative suppliers for their businesses.

In a nut shell, the shortage in ICs was caused by increasing demands and political conflicts.

How will the shortage impact us?

For end users, we may have noticed the slight price increase in our daily lives. But If you are investing in stocks, you will have known that prices of commodities are on the rise. Since it’s just the beginning, it has not reflect on end products yet. By far, the price increase has only impacted the midstream supplier’s profit margin. Consumer electronics are not getting a hit just yet.

But we can see some manufacturers have started to increase MRSP, for example: famous laptop brands ASUS and Acer.

Price increase has got much closer due to shortage in chips and increasing prices on components. 

 

For businesses, we know that the shortage in ICs will last at least one year to two years, Bloomberg gives a good explanation here. We do hope that eventually all the orders can be filled, and we won’t have shortage anymore.

But when will it happen? Now ICs have become limited resources in a few player’s hands, and our dependence on ICs will only increase in the post-pandemic times. Meanwhile, How will the shortage reshape our businesses?

Which industries are the priorities for chips supply? Is it going to be the 5G, Mobile phones, Automotive or Consumer electronics?

 

Taiwan- the most important place to the world. 

The majorities of electronic ICs are manufactured in Asia by TSMC and Samsung, they are what we call- Foundry; the other foundry is in the US- Global foundries. The three players can be seen as the most advanced chipmakers globally. Among three of them, TSMC and Global foundries are pure chipmakers, all they do is to manufacture chips for their clients. 

If it were just TSMC, Taiwan would not become the most important place to the world. Nowadays, Taiwan has the most advanced and complete semiconductor supply chain mainly in Hsinchu, Taiwan. Starting from 1976, with the assistance of Taiwanese government, Taiwan started to invest on semiconductor industry. Originally from Industrial Technology Research Institute(ITRI), the government poured investments to build the supply chain and to incubate professionals. Their hard work has brought out amazing results, TSMC and United Microelectronics Corporation(UMC) are the two largest contract chipmakers in the world, while MediaTek is the fourth-largest fabless semiconductor company(IC design) globally.

Taiwan has hundred of players in semiconductor upper, mid, downstream supply chain, they have formed an unbreakable ecosystem based on their specialties.

We can see that the demand on ICs will only increase, as the technologies develops, we can no longer live without ICs and electronics.

The shortage in chip supply is real, but the manufacturing capability is limited. How are we going to sort out the shortage and to fulfill the increasing demand?