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Accounting & Finance

The effects of a worldwide chip shortage are rippling through the economy

Posted by Kanika Sinha

September 29, 2021

There are silicon chips in nearly every electronic device you own, from gadgets to appliances and even cars. In fact, chips are an integral part of an abundance of everyday items that aren’t immediately obvious, such as microwaves, dryers, refrigerators, electric toothbrushes and PlayStations.

These tiny technological marvels that power so much of our modern lives have been in critically short supply since the early stages of the pandemic as the global supply chain was upended. And this has packed quite a punch in the global economy.

What caused the shortage?

A mix of bad decisions, bad luck and surging demand collectively caused the global shortage of chips.

Bad decisions: When the pandemic started, many automakers canceled their orders for chips based on the assumption the economy was about to take a lengthy hit. Chip companies adapted by retooling their plants to make chips for consumer products and to meet the skyrocketing demand for electronic devices.

Bad luck: A series of misfortunes and extreme weather events that affected some chip plants delayed the manufacturing process further. Earlier this year, Japan’s Renesas plant, a supplier for the auto segment with about 30% global market share, was severely damaged by a fire. In February, Texas winter storms forced America’s only chip plants to halt work. A severe ongoing drought in Taiwan has also affected chip production, which requires massive amounts of water to clean the many layers of metal that go into a semiconductor.

Additionally, the closure of multiple ports in Asia due to the pandemic left hundreds of container ships waiting to dock. While some ports reopened, the transportation supply chain doesn’t have the capacity to handle the backup or the labor shortages now occurring.

Surging demand: As more people were home due to the COVID-19 crisis, demand for smartphones, tablets, laptops and other streaming devices exploded. This pandemic-fueled frenzy went way beyond what manufacturers could provide.

Additionally, the closure of ports in Asia due to the pandemic left hundreds of container ships waiting to dock. While some ports reopened, the transportation supply chain doesn’t have the capacity to handle the buildup or the labor shortages that have been occurring.

Decoding the impact

The prolonged shortage of these tiny chips has started to cripple some industries.

Auto industry remains the worst hit: Chip scarcity has rattled production lines at car companies across the world, forcing automakers to slow production. Some have even announced temporary plant shutdowns.

Ford has already begun limiting auto production. General Motors halted production of some of its pickup trucks and has been forced to park tens of thousands of its completed but chipless vehicles.

Nissan, which earlier announced it would make 500,000 fewer vehicles due to the chip shortage, only recently reopened its factory in Smyrna, Tennessee, after closing for several weeks due to a computer chip crunch brought on by the virus outbreak in Malaysia.

With the crisis stretching on, some carmakers are now leaving out high-end features that require chips to keep at least some production moving forward, according to a May 2021 Bloomberg report.

Ram no longer offers standard “intelligent” rearview mirrors in its 1500 pickup trucks. Renault has stopped putting an oversized digital screen behind the steering wheel of some of its car models.

Used car dealers are delighted: With car production held up by the chip shortage, demand for used cars has soared. Auto dealers across the U.S. are making bumper profits.

Used car retailer Carvana sold nearly 108,000 cars in the second quarter of 2021, a whopping 96% year-over-year increase from Q2 2020. The company expects to more than double its revenue, to more than $11 billion this year.

AutoNation, the largest U.S. auto dealer chain, recorded all-time high revenue in the second quarter of 2021, generated primarily by the surge in used vehicle sales.

The shortage has come for consumer tech: Though some consumer electronics companies that began stockpiling chips early on have been saved from the immense delays the carmakers are facing, even they are struggling now to keep their production going.

Tech behemoth Apple recently warned that the chip crunch is likely to delay iPhone production and that it is already hurting sales of iPads and MacBooks. Samsung had to suspend production of one of its midrange smartphones.

Microsoft is also unable to make enough Xbox consoles and Surface laptops. Sony has warned the Playstation5 will be in short supply until at least 2022.

Additionally, experts suggest that chip supply constraints will soon hit the smartphone industry. Gartner in June 2021 reported that global smartphone sales grew 26% in the first quarter, noting that continuing demand for these devices in coming months may drive up prices.

Everyday appliances at risk: Appliance makers are also likely to face issues in the coming months owing to the short supply of chips worldwide.

Whirlpool is struggling to secure sufficient chips, which is impacting the production of its microwaves, refrigerators and washing machines.

Though chip shortage had not yet disrupted the production of LG, the appliance maker has admitted the scarcity is a major risk.

Consumers to feel the consequences: As the issue of chip shortage is not likely to be resolved any time soon, some products are literally not going to ship or are going to be delayed. It is certain that there will be an uptick in the prices of a lot of devices that require a chip, possibly as high as a 10% to 15% hike.

When will it end?

Owing to continuing COVID-19 outbreaks across the chip supply chain in Asia and other regions, the crunch shows no sign of abating in the immediate. In fact, the supply chain problems are likely to get worse, with many experts suggesting the shortage may stretch into 2023.

Author

Kanika Sinha

Kanika is an enthusiastic content writer who craves to push the boundaries and explore uncharted territories. With her exceptional writing skills and in-depth knowledge of business-to-business dynamics, she creates compelling narratives that help businesses achieve tangible ROI. When not hunched over the keyboard, you can find her sweating it out in the gym, or indulging in a marathon of adorable movies with her young son.

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Accounting & Finance

The effects of a worldwide chip shortage are rippling through the economy

What caused the shortage?

Decoding the impact

When will it end?

Author

Kanika Sinha

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