Due to the pandemic, car manufacturers cut their orders – after all, a new car can contain more than 1,000 chips –and semiconductor manufacturers shifted their output to serve consumer electronics. In the autumn of 2020, when car sales snapped back, not enough chips were available and many car manufacturers were forced to slow or even halt production. At the same time, other businesses started being affected.
In 1990, 37% of chips were made in American factories; by 2020, the share had shrunk to just 12%. The production had switched to Asia (Taiwan, South Korea, China). The supply chains are long: it takes three months to bake a chip in a fab (semiconductor factory), then months for it to end up in a car engine or smart speaker, and even more months to reach the consumer. Around February 2021, order-to-delivery times stretched to an unprecedented 15 weeks; in March 2022 they reached a new high of 26.6 weeks after lockdowns in China and an earthquake in Japan further hampered supply.
Building chip fabs takes years
The White House’s 2 trillion dollar plan to fix American infrastructure included 50 billion Dollars to boost semiconductor competitiveness. In June 2021, another 52 billion dollars were committed under the U.S. Innovation and Competition Act. The following month, the European Commission kick-started the Industrial Alliance for Processors and Semiconductor Technologies aiming at ensuring that Europe achieves the capacity to design and produce the most advanced chips while reducing its strategic dependencies by increasing its share of the global production of semiconductors to 20% by 2030.
However, the acknowledgement that chips are of critical importance for the economy should have come earlier. Building new chip fabs takes years. The world’s largest foundry is the Taiwan Semiconductor Manufacturing Company (TSMC) founded in 1987. The contract manufacturer supplies more chips to the automotive industry than anyone else: but that accounts for just 3% of its revenue; Apple alone represents more than 20%. TSMC, a 550 billion dollar company, controls more than half of the global market for made-to-order chips and 90% of the most advanced ones, the 5-nanometer semiconductors. Each improvement as to process size and increase in performance requires the fab to be retooled with the latest generation of lithography machines to print the chips: they are made by the Dutch company ASML Holding and cost about 175 million dollars each. TSMC and South Korea’s Samsung Electronics are the only manufacturers of 5-nanometer semiconductors at present, but TSMC is already investing 100 billion dollars over a 5-year period to build a new fab in southern Taiwan to produce 3-nanometer chips, which will be 15% faster while using less power.
The challenge for new manufacturers is not just to catch up to where Taiwan is today and China –soon to be the biggest chip producer by volume but not at the latest design level – plans to be by 2025, but to meet them where they will be in the future. Chips improve non-linearly: a 3-nanometer node (generation of chip manufacture) is more expensive than a 5-nanometer one and it’s impossible to skip a node.
So, it is not surprising if chip shortages are still affecting many industrial sectors and are going to persist in the foreseeable future. Besides the Asian near-monopoly in semiconductor manufacturing, other factors are to be considered: the width of the demand has been significantly underestimated as it is now boosted by the wider adoption of the Internet of Things (IOT), cloud technology, 5G and other advanced applications, and supply-related delays limit the production of chip fabrication equipment. In April 2022, TSMC reiterated that its capacity remains tight throughout 2022, while a major Chinese chipmaker is reported to have sold out its capacity through 2023.
In April, ASML CEO Peter Wennink disclosed that a leading industrial conglomerate had resorted to buying washing machines and tearing out semiconductors inside for use in its own chip modules. Turning to such an extreme solution makes it obvious that the issue remains very serious.
Many toys need chips
The toy industry is only partially affected, but many of its products obviously need chips. We have asked international companies about this issue in recent months.
In December 2021, a spokesperson for the Austrian-German Carrera Revell Group said that depending on the complexity of the products, there are problems sourcing the chips needed, forcing them to accept higher prices, buy in advance and allow for longer lead times for production. Carrera Revell expects that this shortage could continue, at least in part, beyond 2022.
In March 2022, Penélope Ferre Vicedo, Miniland’s Chief Commercial Officer, said that all the electric nursery products of the Spanish company had suffered badly: “For some articles, we had to modify the product or change the supplier. Definitely a complicated situation”.
A few weeks later, we heard from Renzo Gentile, Mondo Toys’ sales manager, that the components shortage had generated remarkable problems for the Italian company in regard to the radio-controlled products category: “Accordingly, we had to undertake an adjustment of the production and supply time frames; for the 2022 season we proceeded to anticipate the purchase of electronic parts, postponing the following manufacture of the end product by a couple of months. Unfortunately, we have no evidence that things will get better in the short term”.