Why is there a chip shortage?

Why is there a chip shortage?

Microchips, usually called chips for short, power the modern economy, and can be found in everything from computers to cars, from tablets to toasters, from cool toys to cooking tools. But if they’re so widely used, why is there a chip shortage? Well, the easy answer to that is because of everything. But instead of taking the easy answer, let’s dig into the real reasons behind the chip shortage.

There isn’t just one problem, or bottleneck, creating this constrained supply. In the aftermath of the COVID-19 pandemic, global shipping became unbalanced, and now many products, including chips, aren’t able to get from manufacturers to their customers. In ports around the world, container ships sit waiting to deliver their cargo and to pick up new cargo to travel back across the sea. And with passenger flights at lower levels than before, air cargo capacity is also constrained. So it’s harder for things to move around.

And this compounds the shortage of many products, which have components made in one place, which are assembled into larger systems in another place, which are then used to build a final product somewhere else. This is a problem for manufacturers in places like the United States, because most of the world’s highest capacity and most modern chip factories, which are called fabrication plants or fabs, are located in Europe, the Middle East, and Southeast Asia.

This is changing, and there’s an effort to open new chip fabs in the U.S. and elsewhere, to help increase the geographic diversity of manufacturing. But fabs use some of the most complex technology and processes of anything, that we as humans are capable of producing. So getting these factories up and running will take some time, probably at least a few years. And by the time those are built, there’s the risk that technology will have improved even further in the meantime.

Another interesting factor contributing to the shortage of chips for some industries is the timing and size of orders placed with fabs by customers of various kinds. Early in the global pandemic, many car manufacturers canceled orders for chips in response to predicted low demand for new cars. Though, as things started to normalize again and demand for cars rose, those manufacturers had lost their place in line and had to place orders after other competitors, inside, and outside, their industry.

Because fabs have a finite capacity to produce a given number of chips in a given period. There’s an upper limit to the number of chips that can be made in a particular month, or a quarter, or year, and everyone else has to wait their turn. Related to this, there were rumors that many organizations that use chips in various products have been over-ordering to make sure they can get enough. And that hoarding has further restricted the supply of chips and chip production for other purposes.

And another reason contributing to the shortage that we can’t overlook is that, as in many other industries, illnesses, closures, and the resulting capacity reductions at the factories that make chips, also affected and continue to affect, the number of chips produced.

Delays in shipping, also affect the availability of raw materials that fabs need. Chips are made from silicon, and silicon is refined from silicate materials, like sand and other minerals, which are often mined far away from the industrial centers, where fabs turn purified silicon wafers into chips. The same safety closures and shutdowns that affect factories also affect mining and refining operations.

All of these causes combine to make a shortage of chips that itself sends ripples throughout the supply chain of many other products. Many of the chips we think about in the technological world are advanced, powerful marvels of engineering, running VR headsets and video game consoles, or doing computations in cutting-edge supercomputers. And shortages of these new model chips map directly to delays in getting that latest laptop, or smartwatch, or fancy TV.

But chips appear in many places, often doing unglamorous things, like controlling the valves in the car’s engine, keeping time in alarm clocks, or opening the garage door. Many of the chips that perform these tasks were designed years, even decades ago, and continue to be made according to the same plans. But even these older model chips still need to be manufactured now. For practical reasons, and because many industries have shifted to just-in-time manufacturing, there isn’t a giant stockpile of these chips that manufacturers can turn to instead.

And in many cases, simply switching an existing design to use a slightly different, or more readily available chip, will be met with increased costs, for updating plans and tools, for testing, and changes to specifications. In the case of parts of cars and other products with lots of safety regulations, new designs incur further delays for regulatory approval. So until the supply chain gets sorted out, one way or another, we’ll continue to see delays in the production of all kinds of products, large and small, expensive and inexpensive. And that means we will need to wait to buy that new laptop or that new car.

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