Threat of semiconductor chips shortage is real

While the economies of the world are expected to gather momentum as more and more people get vaccinated, one of the biggest cautions to consider is whether supply chains will be able to keep up with growing demand.

Companies need to review critical areas to address concerns about disruptions to supply chains and shortages that have occurred during the pandemic. A major example is semiconductors. But even before pandemic, the US and China have been engaged in a trade war for over three years now. This has impacted the semiconductor industry which has a global supply chain. The intensity of the situation could be gauged from the fact that US VP Kamala Harris had to undertake a visit to Singapore and Vietnam to woo the companies there to increase production of chips. The outbreak of COVID-19 further worsened the situation, leading to a shortage of semiconductor materials.

Semiconductors are used in almost all “smart” products that consumers buy and their demand is increasing day by day. During the height of pandemic last year, companies tried to meet the demand of the work-from-home market shifting production lines towards laptops and other communication devices for remote work. When the economies began to open up, industries found out that availability of semiconductors has gone scarce. Semiconductors are the foundation of the advanced technologies that we all rely on. From cell phones, laptops and washing machines to refrigerators, cars and airplanes. This is highlighted by global semiconductor sales increasing by 6.5 percent in 2020, according to the Semiconductor Industry Association.

The chip shortages are expected to cause widespread shortages of everything, from cars to electronics to medical devices to technology and networking equipment. While this is bad news for consumers and supply chains, chip manufacturers have experienced a record year in terms of revenue. Companies are investing billions to ramp up their chip output but it will take another two to five years to overcome the shortages.

The semiconductor industry is widespread and diversified. No one country or company has true independence in its value chain. It has different inputs and the companies supplying the various ingredients are spread with their businesses across the world. The highly engineered tools needed for manufacturing semiconductors are sourced from various parts of the world. The manufacturing process integrates hundreds and thousands of people and processes with different skill sets. In the next decade, the industry as a whole would need to incur R&D and capital expenditure of about USD3 trillion to meet the fast-growing demand for semiconductors from all sectors of the global economy. There is a growing demand for increasingly sophisticated chips to power transformative applications such as Artificial Intelligence, Internet of Things (IoT) or autonomous vehicles.

The shortage of semiconductors in 2020 shows that organizations which are connected to this industry need to collaborate and innovate the materials, design, and manufacturing process to not only meet the rising demand but also increase the quality of existing products. Challenges such as geographic concentration of some critical spokes of the supply chain and geopolitical friction among nations must be addressed to make the semiconductor global chain more resilient. Shortages of semiconductors that have been hurting manufacturers of automobiles and other products illustrate the need for companies to ensure that their supply chains are flexible. These shortages, on top of pandemic-related supply disruptions, have underscored the value of understanding and mitigating supply chain risks and developing robust strategies for overcoming the unthinkable.

Effects of chip shortage on Pakistan

While electronic appliances and cars may get costlier and their deliveries may get delayed, the worst affected will be those people who were planning to switch to solar panels in view of exorbitant electricity bills and frequent load shedding. The recently announced Electric Vehicles Policy by government will also hit snags as the issue of batteries and components will multiply. The smartphones industry will be equally affected as giants like Samsung, who recently announced manufacturing in Pakistan, is already facing chip shortages.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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