As one of the most basic principles in economics, the law of supply and demand states that the supply and demand of any good or item will typically rise and fall until they achieve equilibrium or balance. But what happens when there are outside events that prevent the formation of this equilibrium?
Very often, there is chaos. During the 1979 energy crisis, for example, unpredictable global oil prices and supply disruptions led to a spike in prices, panic buying and long lines at gas stations. And just last year, the onset of the global pandemic similarly caused large-scale panic, with shoppers hoarding everything from toilet paper and facial masks to canned soup and instant noodles.
Now, the same situation is brewing in an industry that is not directly noticeable by consumers and businesses in general but may have a severe impact on everyone around the globe nonetheless – There is now an unprecedented shortage in semiconductor chips and steps must be taken to prevent an outright crisis.
How Semiconductors Are Empowering a Fully Connected, Intelligent Future
Just look around; whether for work, study or leisure, we depend more and more on technology devices to get things done. With the incoming wave of IoT adoption, we can expect the number of devices to grow exponentially, with IDC predicting that there will be up to 55.7 billion connected devices worldwide by 2025.
Think about your computers, tablets, mobile devices, wearables, drones and a slew of other previously disconnected objects that will become even smarter and interconnected as we enter the digital age. They all have one thing in common; they all require semiconductor chips to function.
The technology itself has improved by leaps and bounds to cater for the demand for smaller, more complex and intelligent devices. To give some perspective, the first 10µm commercially produced microprocessor in the 1970s was used in calculators, cash registers, ATMs and other simple business systems. Even then, its size was finer than a strand of a human hair!
Fast forward to 2021 and we have far more advanced microchips, even down to 7nm and 5nm transistors (over 1,000 times smaller than the aforementioned 10µm chips) that can power the latest technologies that will benefit humankind now and well into the future.
However, as you can imagine, the process of making these minuscule (yet highly sought after) semiconductors have also become exponentially more complex, involving advanced processes that very few manufacturers are able to master – and therein lies part of the problem.
The Risk of Undersupply and Overconcentration
Currently, there is a shortage in the semiconductor industry across the board, not just for the most cutting-edge 5nm chips but also legacy semiconductors. What does this all mean? In simple terms, organisations across different industries are struggling to get enough semiconductors to build their products. As aptly commented by Gaurav Gupta, Semiconductor Analyst at Gartner, “The problem is even if that 10-cent chip is missing, you can’t sell your $30,000 car”.
All this results in delayed products, supply shortfalls, and ultimately, costlier devices and technologies.
According to CNBC, semiconductors are in short supply due to three main factors; rising demand for electronics (especially during the pandemic), shifting business models which include outsourcing production and effects from former US President Donald Trump’s trade war.
Worryingly, analysts are saying that the global shortage may be difficult to solve in the short term and will remain a problem for quite a while as the demand for semiconductor chips remains higher than ever. Just like the panic buying seen in other industries in times of crisis, we are also seeing the same problem here – with accusations of panic stockpiling of semiconductors and other supplies among global companies that are building up to three or six months’ worth of inventory, disrupting the whole system.
This has exacerbated the problem further, squeezing capacity and driving up the cost of even the cheapest components of nearly all microchips, increasing the prices of final products. While foundries run by companies like Taiwan Semiconductor Manufacturing Company (TSMC) in Taiwan or Samsung in South Korea are making chips as fast as they can, they are still unable to meet global demands.
Another potential problem is that currently, 92% of the most advanced chips are manufactured in Taiwan, the latest report of the American Semiconductor Industry Association (SIA) shows. This excessive concentration of the chip industry makes it highly vulnerable to a myriad of risks, from natural disasters to geopolitics. If Taiwan’s chip production is disrupted for a year for any of those reasons, analysts predict that the global electronics industry will lose nearly USD $500 billion in revenue, effectively shutting down the whole supply chain.
SMIC Forging a Path Towards Becoming Self-Reliant and Disrupting the Global Semiconductor Industry
In response to the problem, there are plans underway for countries to not only boost capacity to meet increased chip demand but also in terms of self-reliance by producing chips onshore rather than relying on cross-border supply chains.
China is one country that has stepped up its efforts on both of these fronts to ensure they are able to address the shortage and meet rising legacy and advanced semiconductors locally and internationally. In a relatively short time span, the country has narrowed the gap with global industry leaders, making significant breakthroughs in integrated circuit manufacturing and R&D.
Just last March, Semiconductor Manufacturing International Corporation (SMIC), China’s leading chipmaker, entered an agreement with the government of Shenzhen to build a new wafer fabrication plant in the city. SMIC Shenzhen will focus on the production of 28nm transistors and above (generally more mature low-end and mid-to-high-end chips), to alleviate the urgent demand for chips in the field of intelligent manufacturing at home and abroad.
The plant, expected to start production in 2022, aims to produce 40,000 12-inch wafers per month – signifying the rapid growth and maturity of the Chinese integrated circuit industry. In November last year, the China Semiconductor Industry Association stated that China will become self-sufficient in 28-nanometer process technology within two years. The industry predicts that this goal will be achieved ahead of schedule by end of this year.
There are plans as well for the development of smaller nanometre process nodes, which are crucial for smaller, more mobile products such as smartphones, as they boost circuit performance and reduce power consumption. In May last year, SMIC built its first 14nm FinFET system-on-chip (SoC) for Huawei, and just one year later, there are already rumours that the company has achieved a 95% yield with its 14nm semiconductor process.
Whether the rumours are true or not, what’s clear is that it won’t be long now before SMIC is able to perfect the 14nm chip manufacturing process, expected to reach maturity as early as next year. Once that is done, the company will be ready to move to more advanced nodes.
Sorting Out Differences to Fulfil Unquenchable Global Demands
We can’t stress enough how important it is for the semiconductor industry, not just in China but around the world, to speed up the development and manufacturing of these transistors.
As Wu Hanming, Academician of the Chinese Academy of Engineering and Dean of the School of Micro-Nanoelectronics, Zhejiang University said, “Currently, the development of my country’s chip manufacturing capacity is seriously lagging behind demand and the gap between supply capacity and demand is increasing. If development is not accelerated, the gap between China’s chip production capacity and demand will widen in the future to at least the capacity of eight SMICs, so the speed must be accelerated”.
This situation will be equally felt everywhere around the world. The rise of digital advancements cannot be abated. Our future is now driven by intelligent technologies powering our offices, vehicles, homes and even cities – backed by the most complex technologies, all built with the tiniest of transistor components at their core.
While the semiconductor industry is traditionally dominated by the US, South Korea, Japan and Taiwan, it seems China is putting in the effort and investment to enter the fray and make significant contributions to the industry.
Nevertheless, geopolitical factors still have a role to play in allowing the industry to thrive in a healthy and level playing field for organisations in all countries. Sanctions have already proven to be detrimental, causing massive supply chain uncertainties and increasing semiconductor prices, leading to the higher cost of electronic devices for end-users.
As the reliance on semiconductors grows across the globe, it is perhaps in the best interest of everyone that geopolitical issues are addressed, and differences set aside (sooner rather than later) to ensure the smooth running of the vital chip industry – especially as the world recovers from the economic and social impact of the pandemic and embraces a more digital future.