Should you worry about the global chip shortage?

You may have heard about the global chip shortage, but what exactly are chips and why are they so important? A chip, or microchip, is another name for an integrated circuit, which is a set of electronic circuits on a piece (or “chip”) of semiconductor material. Typically, the material is silicon. These chips power virtually every electronic device in operation, including cars, appliances, and computers.

The chip shortage is partly the result of increased demand spurred by the growth of the Internet of Things (IoT). IoT is the collection of connected devices – each of which requires a chip – and more chips are needed to build them every day. In fact, according to the Semiconductor Industry Association (SIA), “More semiconductor units were shipped during the third quarter of 2021 than in any other quarter in market history.”

In this post, we explore more about what led to the chip shortage, what's likely to happen next, and how you should react.

Why is there a shortage?

As noted above, more chips were needed to build IoT devices. This demand began before 2020. When the pandemic began, even more chips were needed to build the additional computers needed by workers for use in home offices and by individuals who wanted more or better home entertainment options. So, according to a recent TechRepublic article, “As 5G and cloud-based services grew, more chips were needed for communications platforms like Zoom and video streaming services.”

The problem was further aggravated by several factors:

• Chipmakers have been hesitant to build new foundries. This is understandable given the expense and unknown future of demand. However, some larger companies such as Intel, Texas Instruments and Samsung plan to expand.
• Some device developers have hoarded chips in case they can't buy more when they need them.
• Supply chain issues especially in Asia, where many chipmakers operate, have delayed chip deliveries to places like the U.S.
• Geopolitical issues involving China and Taiwan, the main chip producer, could accelerate, making it more difficult for the US to obtain the chips it needs.
• Weather events have delayed manufacturing in places like Japan and Texas.
• Automakers canceled chip orders early in the pandemic when they assumed people would buy fewer cars. In response, chip companies began producing chips for consumer products.

Immediate impact

Electronics manufacturing companies are reducing production and using older components to build new electronic devices, many of which have increased in price or are less available. The US government is moving forward with legislation that includes spending to increase production and research around semiconductors. And chipmakers are changing their development strategies to address the shortage.

Meanwhile, as companies become more desperate, they tend to be less careful about the quality of the chips they buy and some end up buying counterfeit products. The TechRepublic article states, “Because parts can change hands multiple times, it can be difficult to trace the origins and credentials of the original seller.”

When will this end?

No one knows for sure when the chip shortage will end, but experts, research firms and professional organizations are making their best guesses. The Institute of Electrical and Electronics Engineers (IEEE) expects supply to return to normal by the end of 2021. Gartner predicted it will return to normal levels in the second quarter of 2022. Forrester's prediction that shortages will continue into 2023 is less optimistic. And the CEO of Information, one of the largest chip manufacturers in the world, said the problem could take several years to resolve.

The following news claims that Tesla's Elon Musk predicts the chip shortage will end next year:

How to respond

If your company uses chips in its manufacturing, you may need to get creative in the coming months. In a recent press release, Gartner recommends the following steps (paraphrased):

• Extend supply chain visibility beyond the supplier to the silicon level to project supply constraints and bottlenecks and predict when the crisis will improve.
• Look to partner with similar businesses and approach chip foundries and/or outsourced semiconductor assembly and testing (OSAT) companies as a larger entity to gain an advantage.
• Track key indicators such as capital investments, inventory index, and semiconductor industry revenue growth projections as early indicators of conditions to stay up to date and see how the industry is growing.
• Qualify a different chip source and/or OSAT partner to help reduce risk. Additionally, create strategic relationships with distributors, resellers, and traders to help source small volume time-sensitive components.

If your company does not manufacture but uses products containing chips, your strategy will be different, according to an article from TechRepublic. You should prioritize spending on components that would cause significant problems if they fail, consider alternatives (such as employees temporarily using their personal devices for work), and purchase used or refurbished parts or devices from a manufacturer other than the one you normally use.

Your company may want to use this situation as an opportunity to require less chip-enabled equipment by moving at least some operations to the cloud. This strategy can be particularly useful if you already have a cloud deployment plan that you haven't implemented yet. Or, if you can, simply wait until the situation improves to purchase the necessary technology.

Worry is warranted

Should you worry about the global chip shortage? It depends on the type of business you run, but the likely answer is yes. If you are a manufacturer that makes products that include chips, you will likely need to reduce production, find alternative sources, or even consider creating your own chip manufacturing operation.

If you use these products, you may need to find alternative machines or processes to operate your business. Either way, your organization's leaders will need to continue to be patient and creative as chip supply becomes sufficient again to meet demand.