The demand for semiconductors has increased exponentially in 2021 / Photograph by Yogesh Phuyal

Global chip shortage: Unplanned and unprecedented

Global chip shortage, a consequence of Covid-19 pandemic, might soon turn into an oversupply crisis.

Video gaming on my 12-year-old desktop PC had always been my stress buster over the years. Since games have become more graphic intensive recently, I thought of upgrading it’s graphic card to meet the requirements of the latest games. Searches on e-commerce websites, to my surprise, showed double the prices than what they were before the Covid-19 pandemic hit in 2020. A simple Google search showed "Global Chip Shortage" as the reason, due to the low supply of semiconductors, which are the building blocks of these chips. This made the geek in me forget about buying the graphic card and focus completely to find out about the chip shortage.

Along with the above-mentioned graphic cards, a wide range of other products like automobiles, video game consoles, microprocessors etc., were also affected due to this phenomenon, which is a direct result of the pandemic. Could it have been avoided? I guess so.

I feel like cutting down orders on chips by automobile manufacturers was a mistake when sales slumped post Covid outbreak in 2020. Although, in their defense, no one knew how long the pandemic would last. However, the chips could have been used when life returned to normalcy. When most automobile makers are shifting towards electric vehicles, where chips are ubiquitously needed, I am perplexed that an industry that spends a huge sum of money on research and development missed out on this point.

With less demand for semiconductors during 2020, many production plants decreased their production. Once the demand for cars and other passenger vehicles bounced back during the year's final months, it proved to be an arduous task for these factories to meet the renewed demand while catering to their already existing clients from consumer electronics.

A need for in-house development of chips

I hope other big companies decide to take the approach of Tesla, which managed to thrive through the chip shortage. On top of it, they increased its production by 100% in 2021. They managed to achieve this by dedicating resources to the in-house production of chips and collaborative development with other manufacturers, rather than relying on third-party manufacturers or mediators.

I completely understand that establishing new factories requires billions of dollars and is a time-consuming process. However, since most of the prominent manufacturers are based in western nations, it would be fruitful for them in the long run for sustained development. This will also reduce the need to look east towards China and Taiwan, where most of the semiconductor production plants are located. The US-China volatile geopolitical conditions may take a turn for worse if this dependency continues as it is now.

Cryptocurrency, like everything else, took a hit during the pandemic. It had rebounded relatively sooner, and crypto-miners who need powerful Graphics Processing Units (GPU) hoarded graphic cards whenever they were in stock. I firmly believe that it acted as a catalyst in increasing prices of computer components, gaming consoles and graphic cards. Due to unforeseen and abrupt shortages owing to the pandemic, companies have adopted different strategies like designing their products with a rationed usage of chips, based on the supply of semiconductors. Given the current shortage, almost all production facilities are producing at full capacity. As per J. P. Morgan Research estimate, the current chip shortage will ease slightly by the end of 2022. It is very relieving to be assured that such a horror would come to an end sooner than expected.

A lingering oversupply crisis

I have other reasons to suspect a new horror - that it might turn into an oversupply crisis. Many countries such as the US, Japan, China etc., have allocated large funds into an unprecedented domestic manufacturing of semiconductors to attain at least 70% self-sufficiency by 2025. This large-scale production expansion would be visible by the end of 2022. International Data Corporation (IDC) has predicted that the market will become oversaturated in 2023.

Related link: International Data Corporation report on semiconductor market

It is an observed phenomenon that the semiconductor demand is a cyclic process. There is usually a sharp rise in the demand leading to expansion, followed by a decline for a year or two. Current trends have resulted in chip shortage and a huge demand that triggered the expansion of production facilities. With reports in favour of saturation of semiconductor market, I firmly believe that the semiconductor market is leaning towards an oversupply.