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Why We're Facing a Global Semiconductor Shortage

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The world is experiencing a semiconductor shortage at a time when demand for semiconductors is at an all-time high. Manufacturers can’t make enough of them and we’re now seeing this affect the availability of products.

You probably remember last year Sony released the PlayStation 5 and Microsoft released the Xbox Series X. AMD released the Big Navi GPU (RX 6000) and Apple released the iPhone 12 range. What all these products have in common is they were all directly affected by the semiconductor shortage. Demand well and truly exceeded supply.

What’s causing the shortage?

A perfect storm has hit the semiconductor market. It isn’t one thing but a combination of different things that’s causing the shortage today.

The COVID-19 pandemic

When the COVID-19 pandemic hit, car and commercial vehicle sales took a hit. Estimates suggest that sales fell by 50% or more within a single month. In response, car manufacturers scaled back orders for semiconductors and other parts.

At the same time, demand for electronics chips soared as more people spent time working from home and on furlough.

Laptops, smartphones, drones, smartwatches, tablets, kitchen appliances - everything has a semiconductor nowadays. Then you have IT, data centres, internet infrastructure and cloud and edge computing. All are powered by semiconductors.

And so, the factories that were at capacity making semiconductors for cars switched to making semiconductors for electronics. This was a blessing in disguise for factories because semiconductors for electronics have a higher margin. However, it has caused a problem for car manufacturers who now need to ramp up production.

The situation now is this - car sales are picking up and car manufacturers are fighting for orders against electronics manufacturers. Factories are at capacity and can’t make enough to go around. This is feeding through to nearly every sector.

Ultimately, this is the result of poor planning from car makers who cut orders too deeply last year at the beginning of the COVID-19 pandemic.

Manufacturing limitations

Even before the COVID-19 pandemic hit, there weren’t enough factories to meet semiconductor demand. There were long lead times in 2019 because semiconductor demand outpaced the ability of factories to make them. This problem has persisted through to 2021 and has been compounded by the COVID-19 pandemic.

With most factories running at 99-100% capacity, there is very little room for boosted output. You would think that the solution is to build more factories, but this would not solve the problem today or even a year from now because semiconductor fabs take at least a year to build with another 6-12 months in setup time.

Semiconductor manufacturers are investing in new factories, expansion and more efficient technologies, but short-term solutions these are not.

The US is attempting to bring semiconductor manufacturing to US soil to remedy this or at least reduce dependency on foreign suppliers.

US and China trade war

Calls for domestic manufacturing are heating up in the US and China, the result of a trade war brought about mostly by supply chain disruptions related to the COVID-19 pandemic.

Reports in May 2020 that the Trump administration was in talks with Intel, TSMC, and Samsung about building US chip factories proved true. In 2021, with a new president and Biden administration, these talks are persisting.

The reason a technology trade war broke out between the US and China is because the US imposed a 25 per cent tariff on $34 billion of Chinese imports in 2018. There has been bad blood ever since with threats and action on both sides.

This eventually affected the semiconductor supply chain because in 2020 the US turned to export restrictions targeting the semiconductor supply chain to safeguard critical infrastructure in the telecommunications sector. This followed a 2019 ban on the Chinese company Huawei for “national security reasons”.

For example, one of the consequences of export restrictions was that American firms were cut off from chips made by China's Semiconductor Manufacturing International Corporation - the third largest chip maker in the world with 11% market share.

Local production problems

Factory shutdowns due to natural disasters, bad weather and the COVID-19 pandemic have caused semiconductor supply chain issues.

Most of the world’s semiconductors are manufactured in Taiwan. Taiwan Semiconductor Manufacturing Co., the world's largest contract chipmaker, has a 28% market share. The second largest, UMC, also based in Taiwan, has a 13% market share.

Taiwan is experiencing serious water droughts in 2021. Millions of tonnes of water are required to manufacture semiconductors every week. Taiwan Semiconductor Manufacturing is having to bring water in on trucks and UMC are doing the same. This has caused significant drops in manufacturing efficiency.

The US is also experiencing shutdowns. NXP Semiconductors had to shut its plant in Austin, Texas, due to winter weather in February 2021.

Factory shutdowns cause order backlogs and extended lead times. Orders persist and pile in whether a factory is down or not. This squeezes supply chains, causing a shortage.

How long will the semiconductor shortage persist?

We expect the semiconductor shortage to persist through 2021 but ease towards the end of the year as demand for electronics chips decreases as COVID-19 lockdowns end. This will cause a shift in supply from electronics semiconductors to automotive semiconductors which will provide the industry with a much-needed equilibrium.

The world’s largest semiconductor manufacturers - TSMC, UMC, SMIC, Samsung, Intel, SK Hynix - are investing in increased output. Many investments were in the pipeline as early as 2019 and are expected to yield results at the end of 2021.

Right now, there is a serious imbalance in the demand for semiconductors, one that our existing infrastructure is not built to cope with. This imbalance will ease over time. 

How can supply chains continue to meet demand?

If you have been impacted by the semiconductor shortage you can meet demand by partnering with an electronics components distributor like us.

We specialise in the procurement and delivery of semiconductors and parts for a wide variety of industries from the world's leading manufacturers. You can find out more about what we do here. Email us if you have any questions.

 

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