The Scarcity of Chips Scares IT Investors

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The Scarcity of Chips Scares IT Investors

Many companies design and develop chips, but only a few manufacture them. Accounting for 56% of the foundry market, Taiwan Semiconductor Manufacturing Corporation (TSMC) dominates this industry.

"Data is the new oil!" You've probably heard this claim multiple times. If oil was what powered the twentieth century, data is what's powering much of the world today. So, the analogy seems pretty fitting indeed.

The most crucial components that drive this data are semiconductors, also called chips. Usually made of silicone, these chips were once associated with just computing. But over the past few decades, computer chips have become integral to every electronic item. Even objects that we might not expect, like fridges and kettles, have become increasingly convoluted, demanding more chips. Essentially, every innovation made in the last decade that uses power also uses chips. However, the global market today is going through a severe chip shortage.

Contrary to popular belief, this drought is not solely caused by COVID-19. Chip manufacturers were already facing difficulty keeping up with the surging demand in the face of innovations. Then the pandemic led to an excessive need for electronic items as worldwide online activities escalated. On the other hand, the dwindling demand in the automobile industry has led investors to shift their focus to electronics. The suffering supply chain got worse when a lockdown forced the shut down of chip-making facilities in several countries, like South Korea, Japan, the US, and China.

Many companies design and develop chips, but only a few manufacture them. Accounting for 56% of the foundry market, Taiwan Semiconductor Manufacturing Corporation (TSMC) dominates this industry. Major companies like Apple, NVIDIA, QUALCOMM, and AMD outsource their manufacturing to TSMC and other chipmakers in Asia. Even Intel is not self-sufficient. Almost everything rests on the shoulders of TSMC, which is the weakest link in the chain.

Now that the pandemic has eased, a question might arise: Can't we simply make more chips? Well, manufacturing chips is incredibly difficult, and it is getting tougher. Making these chips involves giant factories with multi-million dollar machines, dust-free rooms, molten tin, and lasers. It typically takes over three months to transform plain sand into transistors. Moreover, it takes years to build these semiconductor fabrication facilities.

In the past year of chip shortages, companies have adapted in various ways, including changes in the design procedure. According to a survey, nearly two-thirds of engineers are designing more based on the availability of components rather than preference. For instance, automakers have shown they are willing to go without advanced features, such as reclinable seats, because of the absence of a chip.

Regardless, the economics here are brutal. Chip plants run twenty-four hours every day of the week to balance out the outlay. It costs around USD 15 billion per month to build an entry-level factory that produces 50,000 wafers. Accounting for most of this investment are three companies: Intel, TSMC, and Samsung, which cost over USD 20 billion each. Billions are spent on new plants and facilities, only for them to become obsolete in five years or less.

That is why achieving semiconductor self-sufficiency is an arduous task, even for countries like China and the US. China, in its latest five-year plan, has mentioned chip independence as a top national priority while US President Joe Biden has vowed to build a secure American supply chain by reviving domestic manufacturing. Likewise, the European Union had set a target to double its global chip manufacturing capacity by 2020. However, it was not an easy target.

Although the chip shortage has been easing a little, the world is hungry for products enhanced by a growing volume of chips. They will be kept waiting until the supply catches up with the rising demand. For less advanced technology nodes, the supply chain balance may be restored sooner rather than later. Still, since there is a growth in demand for chips for hyper-scale data centers, AI, and crypto mining, those chips will be in short supply for an even longer period.

As chip shortages are likely to last through at least 2022, consumers should make up their minds for possible delays and price hikes. If you, like many others, have been waiting to get your hands on the brand new PS5, you might have to wait a little longer, especially in an import-based market like Nepal.

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