The U.S. economy is supposed to be revving back up, but something keeps getting stuck in the gears. While isolated to a handful of sectors, product shortages of everything from wood to gasoline are becoming tougher to miss. A lot of these shortages—cars, phones, gaming consoles, even automated dog-washing booths (!)—have the same thing in common: They need semiconductor chips, which are themselves in short supply. Major tech companies believe the problem will persist for the next couple years; PlayStation 5s could be scarce through 2022. What caused the one supply chain shortage to rule them all, and how long will it last? Some answers, and some bad news.
What are semiconductors?
Semiconductors are the chips that manage functions like data storage, graphic rendering, and power consumption in electrical devices. They are typically made of silicon wafers and are omnipresent in today’s digital world. Goldman Sachs reports that 169 industries in the U.S. have products with embedded semiconductors, and that there will be a 20 percent average shortfall of the components for the affected businesses. There are numerous varieties of chips and, in the past, shortages have typically been limited to a certain type. What’s made the current shortage so difficult to manage is that it’s affecting many different types and brands all at once.
Why is there a shortage?
As with seemingly everything these days, the problem has to do with the coronavirus pandemic. Last year, demand surged for laptops, monitors, smartphones, video-game consoles, and other devices as large segments of the population had to work and entertain themselves at home. In addition, Chinese tech companies have been hoarding semiconductors in anticipation of U.S. sanctions restricting the country’s access to chip technology. Several major factories have also had to halt production due to fires, blizzards, and droughts, and renewed interest in Bitcoin has put a rush on cryptocurrency mining equipment, which, yes, requires semiconductors.
So it’s going to be harder to get electronics?
Yes. Beyond PlayStation 5s, Apple has said that difficulties in procuring chips is hamstringing production of iPads and Macs, potentially costing the company $3 billion to $4 billion in sales for this quarter. CEO Tim Cook has said that Apple is having more issues with finding older models of chips that go into screen displays rather than the newer, high-tech ones. These difficulties have apparently lengthened delivery estimates for the company’s 2021 12.9-inch iPad Pro. Samsung also announced in March that it may skip the launch of the new Galaxy Note smartphone, and it looks as if Google is limiting the distribution of its forthcoming Pixel 5a to only the U.S. and Japan.
It’s not just these high-tech products that are feeling the squeeze. Appliance manufacturers in Asia say the shortage is affecting chips that washing machines use to weigh clothes and that toasters use to warm up bread. The Washington Post reported last week that a major supplier of automated dog-washing booths to parks and the U.S. military can’t acquire the usual chips that its products rely on to handle transactions and dispense soap and water; it is now weighing the option of ordering a substitute chip that will ultimately raise costs and delay deliveries. Machinery manufacturer Caterpillar also said last month that it is anticipating problems with chips later in the year as demand for construction and mining equipment grows.
The automobile industry is one of the sectors that’s been hit the hardest by the shortage. Demand for cars dropped sharply at the beginning of the pandemic, so many automakers decided to cancel their orders for chips. Car sales then had a stronger recovery than expected—people are going back to workplaces, their wallets a bit heavier thanks to government stimulus checks—but by the time auto companies tried to reorder the necessary chips, semiconductor manufacturers already had their hands full with the spike in demand for other electronics. In addition, a fire in March at Japan’s Renesas Semiconductor Manufacturing Co. Ltd. factory, which supplies two thirds of all chips used by auto makers, severely disrupted global supply chains. Consequently, car companies have had to pause operations. Volkswagen has paused production at plants in Mexico, Germany, and Slovakia. Mercedes-Benz is halting operations at two plants in Germany, and Ford is scaling back production in the country as well. These production problems are now contributing to a spike in prices for new cars, which often have thousands of chips. Some manufacturers are reporting 10 to 20 percent price increases for certain cars. It’s so bad that demand is causing a shortage of used cars, too.
But these companies have a plan to fix this, right?
Executives at Intel, the world’s biggest semiconductor company, say that it will take about two years for the industry to construct more chip factories to meet the demand. Intel itself is spending $20 billion to build two new factories in Arizona. Taiwan Semiconductor Manufacturing Co., another major chip manufacturer, is investing $100 billion over the next three years to expand capacity, including by building a plant in Arizona as well. President Joe Biden’s infrastructure package also includes $50 billion in subsidies for semiconductor factories, a provision that has received bipartisan support. The president further signed an executive order in February for a 100-day review of the semiconductor supply chain. Startups and venture capitalists are trying to attack the problem as well by trying to find effective new ways to develop chips more quickly, though it’s unclear whether or when those efforts will pay off.
There are also a number of shorter-term strategies that these manufacturers are pursuing to alleviate some of the more pressing problems resulting from the shortage. Intel is opening its factory network to companies that design chips for cars with the goal of getting more semiconductors to the automobile industry in six to nine months. Electronics distributors are checking in with companies that might have extra chips lying around, and manufacturers have been trying to find ways to marginally improve production rates at existing factories by increasing the speed at which chips move down the line and delaying maintenance.
This is very clarifying but here’s my real question: When is my PlayStation coming??
Can’t help you.