The Semiconductor Shortage Hangover: The Industry Is Creating Resilience

Several years back, the world found itself in a situation that nobody even dreamed of: there were not enough chips. Not potato chips but semiconductor chips, the small electronic gadgets that run smartphones and cars, refrigerators, and medical equipment. The 2020-2022 global semiconductor shortage shook almost every sector of the economy and sent a resounding message: the world was in a very perilous state of relying on a thin supply chain. The industry is yet to recover, and the lessons learned are redefining the whole industry.

What was the Cause of the Shortage?

The crisis was caused by a number of factors that came together at the most inappropriate time. The pandemic meant that the factories were closed, and consumer electronics were in high demand as people worked and studied at home. The production slowed at the same time demand for chips was high.
Meanwhile, the automakers had reduced their chip orders as they anticipated the car sales to decrease. In the case of a demand recovery that was stronger than they predicted, they ended up behind other industries in the queue. The manufacture of cars in different parts of the globe was stalled due to the lack of the missing chips that could only cost a few dollars each.
It was all aggravated by the geographical clustering of chip production. Much of the sophisticated semiconductors in the world are produced in Taiwan, and much of the rest in South Korea. Any natural disaster, political conflict, or fire in one of the locations can disrupt global supply in a moment.

The Aftermath

This gave rise to billions of dollars in lost production in the automotive, electronics, and consumer goods industries. It underlined the importance of semiconductors – and how minimal redundancy there was in the supply chain.
Prices of certain chips rose drastically. The lead times, the amount of time between placing an order and receiving a chip, had grown to weeks (or considerably more than a year) to obtain some components. The firms that had practiced lean inventory models based on the just-in-time inventory models were caught unawares.

Building Resilience

The world governments and companies reacted urgently. In 2022, the United States enacted the CHIPS and Science Act that pledged billions of dollars to domestic semiconductor manufacturing. The European Union introduced its own Chips Act, with similar intentions. Japan, South Korea, and India all declared big investments in semiconductor production.
The largest chipmakers, such as Intel, TSMC, and Samsung, declared enormous expansions of their factories in the United States, Europe, and so forth. It is not a minor investment. New semiconductor fabs (as they are known) cost tens of billions of dollars to build and require years to be operational.
Firms also started reviewing their inventory policies. Instead of placing orders when demand was high, most organizations began to maintain larger inventories and establish longer-term supplier partnerships.

The Long Road

It does not take semiconductor resilience building a short time. The chip fabs are very intricate plants. It takes years to train the specialized workforce that is required to run them. And the technology itself is in a constant state of development, i.e., the investments made have to be able to predict the needs tomorrow.
Oversupply is also of concern. All these new factories are going online, and there is a danger that the market will be saturated with chips, thereby bringing the price down to nil, thus making some of these investments not worth it.
The semiconductor business is crossing a crossroad. It was a bitter lesson in shortage, but it might have led to the very type of systemic change that the industry was in need of. A more decentralized, resilient chip supply chain is being created – and the whole world will become more stable because of that.