The pandemic isn’t the root cause of the chip shortage — Here’s why

Laura Ockel — Unsplash

Increased demand

Firstly, strain was put on the supply chain because of increased demand. Government policies to limit the spread of COVID-19 were put in place at various times in the pandemic. Lockdowns and other forms of ‘stay-at-home orders’ occurred globally and restricted large swaths of the population to the confines of their homes. There are two key streams of demand-driving behaviour changes. On the one hand, there is the necessity to work and study remotely. As companies and institutions moved online, end users saw a greater need for peripherals, such as keyboards, mice, and monitors, as well as personal computers for those who previously did not need them (Stewart & Crossan, 2022).

Demand uncertainty

Secondly, demand uncertainty led companies to reduce forecasts and cancel orders in anticipation of a recession, leading to issues when demand increased relatively soon after due to unprecedented government stimulus (Santacreu & Labelle, 2022). A particular example of this is the automotive industry. Fabs that were already running at capacity could quickly pivot the freed capacity to other orders (Lapedus, 2022a). While this was beneficial to the fabs in the short run, it also meant that little to no spare capacity was available when demand from automotive increased again. An added complication is that automotive chips are produced on 200mm wafers. 200mm fabs had been running at full capacity before the pandemic due to earlier plant closures (Lapedus, 2018).

The underlying shortages

Though increased demand is the straw that broke the camel’s back, even if fab capacity could have been added, it could certainly not have been used. Other shortages had already occurred in the upstream supply chain at the current ‘stretched’ capacity. There are three key shortages resulting in overall short-term supply chain disruption: (1) silicon wafers, (2) photomask, and (3) ultra-pure water (UPW).

The root cause

It is interesting to note that these issues were not necessarily directly related to the COVID-19 pandemic. E.g., the pandemic did not directly disrupt wafer supply. Instead, increased demand seems to be the main driver that exacerbated existing shortages. There is, however, one more driver caused by the pandemic that has hit all industries, including semiconductors. Logistics. Worldwide shipping was disrupted on many occasions due to restrictions imposed by governments around the world. China, which is particularly important for raw materials for the semiconductor industry, saw up to 7% of freight unable to leave ports in 2021 (Accenture, n.d.; Vakil & Linton, 2021).

The future

Additionally, as firms invest in more ‘fab’ capacity, we will likely see shortages of ‘mature’ node silicon wafers (200mm) and 200mm tooling & DUV equipment as firms are unwilling to invest in 200mm wafer production. On the leading-edge node of 5nm, which uses EUV on 300mm wafers, we will likely see continued shortages of EUV equipment because of the monopoly by ASML on the market and the rapid investments into new EUV fabs that far exceed the historical pace. There is also an interplay between both shortages. When 200mm capacity is unavailable, firms will be incentivized to switch their production over to 300mm processes, further increasing the demand for new 300mm EUV fabs.

References

Accenture. (n.d.). Semiconductor Companies: Business Resilience in the Wake of COVID-19 A guide to the disruptive impacts & practical actions for semiconductor companies to take.

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Thomas Konings

Thomas Konings

MSc in Management (MiM) student at London School of Economics, MSc Finance from RSM, seeking to connect Finance & Management for better decision-making.