Why is there such a big chip shortage?

Why is there such a big chip shortage?

There's a huge problem in all sorts of industries right now, from graphics card manufacturers, to auto makers, and it's all down to a global shortage of semi-conductors. There are a number of reasons behind this problem and it's not likely to go away any time soon, but let's take a deep dive into just why everything from graphics cards to new cars are in short supply, what effect that's having on various industries, and when we might expect things to return to "normal."

Pandemic knock-on-effect

It should come as no surprise that the Coronavirus pandemic has been a major impacter on this silicon shortage. The reduction in staff to perform important production tasks and fabrication maintenance has meant that the raw supply of new silicon has been lowered over the past year. That has a significant effect on the number of chips produced and the number of products that they can go into. It takes some time to hit too, with supply issues filtering through over many months — we're still feeling the dip in production from last year because we haven't caught up yet.

Not only that, but the entire semiconductor supply chain has been disrupted in the same way. Chip production has only recently recovered to pre-pandemic levels, but that's not the case for everything. Raw material production has been down, as have distribution networks, and many other feeder industries that keep the behemoth of silicon production moving. Even now, in 2021, not all of those are fully back up to speed yet and that continues to be an anchor weighing down the entire industry.

It's a demand issue too

It's not just that the pandemic hit the supply side of things too. We've also been buying a lot more. With time on our hands, and an inability to go anywhere or spend money out and about, we've all been buying more electronics to play with at home. Whether it's one of the new-generation games consoles, a new RTX 3000 or RX 6000 graphics card, new smart home gadgets, any of thousands of new cars that use more chips than ever — it's been an enormous additional demand on silicon. The PC hardware industry took a monstrous 20% leap this year alone, despite years of decline.

The resurgence of cryptocurrency mining hasn't helped matters either. With surging prices for Etherum, direct GPU mining is more popular than ever. And companies like Nicehash are offering Bitcoin in trade for PC owners running their CPUs and GPUs to mine lesser altcoins, so there's plenty of profit incentive to buy up new CPUs and GPUs as they go on sale.

Many other industries are being hit with similar increases in demand due to the pandemic and its direct and indirect effects, putting additional pressure on a silicon supply chain that was already straining at the seams.

Tariffs don't help matters, either

Some parts of the world have been hit worse than others, and the U.S. is one of them. Thanks to tariffs enacted by the last presidential administration on a variety of products and raw materials, supply has been slowed and prices have risen for some of the most popular products out there, simply because they're harder to get and more costly to import. Combined with the aforementioned supply and demand problems and it's proved to be a perfect storm to create a variety of shortages and price hikes that make it prohibitively expensive for anyone to buy just about anything electronic.

What's being done, and when will it end?

For the companies making all these products, the past 12 months have been a real mixed bag. On one hand, it's been great to sell out of all their products, as they're making a killing — especially as prices have risen. But they're still leaving a lot of money on the table, and that's something that capitalism cannot abide. Many of them are constrained by the lack of actual silicon to produce their products though, with some automakers expecting to lose billions of dollars in 2021 as they just cannot get enough of their cars made to sell.

Silicon fabricators like TSMC, Intel, and Samsung, are all ramping up production to improve the supply side of the equation, at least, investing tens of billions in new facilities in the U.S. and around the world. But these facilities take time. That kind of investment doesn't happen quickly and many of these new plants aren't even expected to begin printing their first wafers until some time in 2022.

That means that we can't expect this current problem to be solved over night. In fact, it's likely to be around for most of 2021, even as the world starts to lumber back to its feet after falling well and truly on its face in 2020.

Expect most popular electronics to still be expensive through much of 2022, even if things start to slowly improve over the next 12 months.

Image source: Mr Seb/Flickr