The usual fanfare around festival discounts for automobiles and electronic gadgets seems relatively mellow this year. Reason: the semiconductor crisis. But why deem it a crisis? The spill-over has affected a significant number of industries, their consequent outputs and industry targets. According to a report by Gartner, the global shortage will continue well into mid-2022.
The chip, equivalent to 1/billionth of a meter, carries the world on its tiny shoulders. From smartphones and pacemakers to hypersonic aircraft and electric vehicles, the chip has made sure we know its value. Naturally, the shortage of such an essential piece of the puzzle was bound to throw industries off. Maruti Suzuki reduced its production by 60% in September 2021, owing to the chip shortage, thereby extending the waiting period for a 4-wheeler. Hyundai reported a 34.2% decline in sales during the same month.
The shortage has been incoming for some time now. While the pandemic and subsequent lockdowns did affect the supply chains, they weren’t the only cause for this crisis. There’s a simple demand-supply loop at play here.
In the initial months of the pandemic, the demand for automobiles plummeted across the country. The shift from physical offices to a work-from-home set-up added to the need for laptops, computers, servers – the other set of semiconductor dependent products and services. The demand for laptops and tablets rose to 200% and 90% (respectively) as per pre and post-lockdown numbers according to the senior marketing members of Flipkart, a leading e-commerce site in India.
It would be fair to assume that semiconductor manufacturers moved priority from Industry A (Automobiles) to Industry B (Electronics). While this could have helped meet demand temporarily, the crux of the problem remained intact – the impending supply shortage. Given the high demand for semiconductors and the move to digital during the pandemic, the impact of supply shortages made industries especially vulnerable.
As tiny as it is, the semiconductor demands an extensive R&D process. Further the finished output takes approximately 26 weeks to complete. The global crunch has reinforced that necessity is the month of all innovation. Tech giants, like Amazon, Tesla, Apple are now focusing on niche semiconductor chips – ones that are specific to their products and services, thereby avoiding the mass shortage as much as possible.
Apple has already moved towards its own M1 processor, Tesla and Baidu are investing in AI chips to improve the autonomous driving experience.
A Deloitte analysis identified the “Big 4” in the Asia Pacific. The region is the world’s biggest semiconductor market, accounting for 60% of global sales. The “Big 4” include South Korea (19%), Taiwan (6%), China (5%) and Japan (5%). Across the Pacific, the US leads the list with a 47% overall semiconductor revenue.
With a surge in demand for these chips, the semiconductor industry is the latest addition to the subsidy lists of governments. In Taiwan, a dominant producer in the market, the government covers almost half of the land and construction costs and 25% of the equipment costs. In China, the government aims to spend $200 bn to subsidise the industry by 2025, while the US has issued a bipartisan vote to invest $52 billion towards the research and production of new chips.
The Indian Chapter
Given the lack of consistent policies and high costs in the R&D stage of semiconductor production, big players are not too keen to invest in India.
Mr Rajeev Khushu, Chairman, India Electronics and Semiconductor Association has vouched for ATMPs – Assembly, Testing, Marking and Packaging as the first step to luring international companies. These include the likes of Intel and Samsung before going for the big guns. The ATMP facilities will not only help generate employment but also mark India’s entry into the semiconductor sector with relatively less investment, he says.
Meanwhile, the Government of India has been doing some intensive follow-up of its own. The Ministry of Electronics and Information Technology (MeITy) has already drawn up the Scheme for Promotion of manufacturing of Electronic Components and Semiconductors (SPECS). According to the scheme, a financial incentive of 25% will be provided for capital expenditure on a list of electronic goods with an identified downstream value chain, which in turn will encourage high-value manufacturing.
India is also aiming for a $7.5 bn trade deal with Taiwan, which holds 56% of the foundry business of manufacturing chips. The deal will benefit both India and Taiwan – with the former developing its self-reliance in the industry and the latter building its own diplomatic relations in order to come out of the ever-looming Chinese shadow.
The current crisis requires resource-abundant countries to share their knowledge and expertise with growing economies. To get through a global shortage of this magnitude, every economy has a role to play. Unless that is accommodated, it is going to be a tough road for every player in this supply chain.
The opinions expressed in this essay are those of the authors. They do not purport to reflect the opinions or views of CCS.