Craving Chips - How a global chip shortage may put you on a digital diet

If the word ‘semi-conductor’ pushes the snooze button in your head, hold your horses. It may sound like some far away, uninteresting thing, but they are indispensable to our daily lives.

Semi-conductors provide the nano chips (from 10nm and 5nm today to eventually 2nm) needed to run a wide range of electronic devices, including smart phones and game consoles, and importantly provide the chips required to run data centres and to enable cloud computing. The upcoming 5G mobile network is equally a chip guzzler and we can’t drive electric cars without them.

Our modern lives totally and utterly depend on chips. In fact, chipmakers are the proverbial steel-mills of the future, considering the role of chips in Artificial Intelligence and the fact that chips will be embedded into every conceivable device we use and maybe - even in our bodies by the end of this century.

Where semi-conductor manufacturers are based and why that matters

Semi-conductor foundries are few, very few, in number and this is a source of potential tension. The biggest manufacturers of the smallest, most advanced chips we all crave so much, are based in Korea and Taiwan. The US has its fair share of the semi-conductor industry with its leading foundry Intel, which today, however, is still only making 10nm chips, which are at risk of becoming outsmarted by their smaller cousins. China is able to produce only about 16% of its total chip needs at home and Europe (including the UK) does not have its own foundries at all. There is a bit of a survival-of-the-fittest competition to it.

The big shortage: cars, game consoles, 5G, and that new smartphone

When the pandemic started in March 2020, orders for everything and anything were cancelled and orders for chips were put on ice.

Chip producers halted production and supply dried up. But then demand accelerated. When we were being abruptly turned into a Work-and-School-from-Home crowd, we started buying new and better technology. A lot of new technology. Cloud computing took off like a rocket with all of us on Zoom most of the day and then, against the odds, people also bought more cars, to travel more safely. The supply side could not keep up and had to prioritise who was going to have 1st dibs in chips. Most foundries now run on a 100% capacity, but it is far from enough.

As a result of the chip famine, Apple announced in November 2020, that it was slashing production of its iPhones by 20% in the first half of 2021. Sony has already said it will be unable to fulfil all the demand for its newest gaming console in 2021 due to the shortage, and Samsung is delaying its next Galaxy Note smartphone and you may have to wait for your Playstation 5 too. And the expected delay in the roll-out of 5G will make all of us feel the pinch as it will mean hanging on to the status quo for that bit longer. Many car manufacturers are having to pause their production lines due to lack of chips; Ford, Volkswagen and GM - to name a few - say that their 2021 output may be down by 10-20% (and their share prices are following the same trend…).

Chips and economic growth

The Pandemic of 2020 and the speedy big digital it brought along, have changed the face of the world and have put a giant spotlight on the fact that a modern, digital economy can’t grow without chips. This means that chips are now as important, if not more, than oil to make this happen. The governments around the world are scrambling to get their semi-conductor act together. Counting on Korea and Taiwan to make the high-tech economic growth materialise is a very uncomfortable position to be in and solutions must be found, soon. As the US and China vie for economic supremacy, the ‘chip competition’ is in full swing. Seeing both the Chinese and American navy doing ‘exercises’ around Taiwan on a regular basis proves how high the stakes are. “All chips are in”.

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