The Semiconductor Crisis: causes and possible remedies

Updated: Nov 29, 2023

Author: Rocco Aricò

Date of Publication: 10/05/2022

The world of industry has long been threatened by the lack of microchips. The semiconductor crisis arose in December 2020 following shortages in some industrial sectors. Also, the causes are various, but they are mainly attributable to the production strategies of the multinationals that have underestimated the quantity. In particular, the strategy used by the largest companies, to minimize storage and logistics costs, is that of "just in time" where production is estimated on the basis of sales volumes.

Due to the pandemic crisis caused by Covid, the sales projections of the largest consumers of microchips (car makers and manufacturers of technological devices) have been more conservative than they actually were. In fact, the demand for electronic products during lockdown periods and with the explosion of smart working has increased by about 13%. Therefore, companies have responded by slowing down orders in some sectors such as the automotive one. As a result there was an increasing share of production capacity to those sectors in turmoil not adjusting their activities to the return of demand.

a circle map about covid electronic consumption

All these explain the delays or the total shortage of semiconductor supplies that have led a large part of the automotive sector to cut production and activities due to a lack of electronic components. For example, emblematic are the cases of the Volkswagen and Daimler plants in Germany, Stellantis in Italy, Ford and GM in the United States, Nissan, Toyota and Honda in Japan.

Semiconductor Crisis: Moore's Laws and the Taiwanese Government

To better understand the developments of the semiconductor crisis, we need to go beyond the reasons deriving from the Covid 19 crisis and its consequences. First of all, it is imperative to remember the laws of Moore, co-founder of the infamous Intel microprocessor company. In particular, these laws have been the basis of innovation for over 50 years and have found obstacles only at the limits of science. In essence, Moore argued that the complexity and relative performance of a microcircuit, measured by the number of transistors per chip, doubles every 18 months.

Also, it quadruples every three years and consequently the second law, namely "The cost of manufacturing equipment semiconductors doubled every four years ". It is precisely the rising costs that have favored the shift of production to Asia. For example Taiwan represents 53% of world production, where companies such as Taiwan Semiconductor Manufacturing Corporation are based.

Not to forgot South Korea with Samsung Electronics and, to a lesser extent both in terms of quality and quantity, China, in particular Semiconductor Manufacturing International Corporation. So, Asian companies are able to achieve large economies of scale, thanks above all to the low cost of labor and materials.

Over the past year, in Asia, climatic conditions have favored an arid climate, especially in Taiwan, causing water supply sources to dry up. These are needed during the microchip manufacturing processes. In particular in the cooling phases of the machinery and above all for the cleaning of the platelet support; contributing to the slowdown in production.

States, Bodies and Supranational Companies

Reassuring signs emerge from governments and multinationals around the world who say they are willing to invest several billion dollars for the recovery of this sector.

Europe

Already in July 2021 the European Commission (EC), in line with the industrial alliance, led the technological developments necessary for the success of companies and organizations. The main topic was establishing plans to identify current gaps in microchip manufacturing.

The European Chips Act is the project proposed by the European Commission, which provides for the allocation of over 43 billion euros. It is a mix of public and private investments with the aim of establishing production in Europe and beyond. The objective is also to define precautionary strategies capable of anticipating and / or promptly responding to any future shocks regarding the production and supply chain of the microchip.

United States of America

US companies have long lost leadership in semiconductor manufacturing. Multinationals today prefer to entrust foreign companies with the production of the necessary quantity of products.

Experts estimate that $ 10 to $ 20 billion will be needed to build new plants, in addition to a time frame of 2 to 4 years. Disappointing figures, especially as regards the possible construction of new plants on American soil, given that the intellectual property laws that protect less have been in force for years now. It is precisely for this reason that investors are discouraged by a possible flight of intellectual capital. Therefore by a high probability that innovations will be "pirated" around the world.

Consequently, state interventions are fundamental. The United States is well ahead in thinking about how to revive production capacity. The Biden government has been organizing a task force on this for months. Investments of approximately 150 billion dollars are assumed to allow America to make a "productive recovery" with a timing of 2/3 years.

Among the major multinationals in command is Intel which has allocated about 80 billion dollars for the construction of new plants.

Taiwan

Positive signals are also coming from the East, in particular from the Taiwanese Ministry of Economy. Through various official press releases, it is ensured that the country holding world leadership in semiconductor production is working to resume and optimize production processes. Therefore the aim is to balance supply and demand.

The world's largest company in this industry, Taiwan Semiconductor Manufacturing Corporation, has pledged billion-dollar investments to implement manufacturing. In addition to this, it has already announced for some time that, according to its own estimates, the situation should return to normal in the course of 2022.