Shortage of Microchips Costing Consumers More, Perhaps for Years
A sharp increase in the demand for microchips, which are in many of the products consumers use daily, has led to a critical shortage.
Dozens of everyday items used by every American operate fully or in part by way of computer chips. Everything from cell phones to video games, cash registers to automobiles uses microchips. Alarmingly, the United States – along with the world – is experiencing a severe shortage in the number of chips available, and it’s driving up costs and delaying production of everything from cars (even the price of used ones) to laptops.
Unfortunately, there was no surplus supply of the chips to soften the blow when the shortage hit. According to Paul Clifford, president of information technology company the Davenport Group, American manufacturers order computer chips on a “just in time to build it” basis, and that intricate system was working well, until the unforeseen happened – the COVID-19 pandemic.
“What happened when the pandemic hit is people went home to work, so they weren’t coming to offices anymore,” said Clifford. Now, what was needed for those at-home workers were things like a laptop, a computer, a camera, microphones, and the bandwidth to connect all those people who were now working at home.
“Well, that’s fine, if the infrastructure in their companies, in their governments, were in place to support that type of IT architecture. Most were not. They were designed to build a workplace and a work force that was in one or two or five locations, not in hundreds of locations.”
University of South Carolina computer engineering Professor Ramtin Zand said another factor followed the pandemic to take the chip situation from a shortage to a crisis: panic buying.
“The customers that used to have 1000 orders a year, now they’re ordering tens of thousands of components and chips, mainly for two reasons. One is the impression that if you have bigger orders, you can have higher priority for that company to deliver that to you. The second reason is they can’t predict when this is gonna end, and they’re trying to fill their storage.”
The country, and the world, are now feeling the consequences of the crisis, said Zand. “Obviously, we have an imbalance between supply and demand, which is going to impact the market equilibrium.”
Add to that inflation in the price of anything containing a microchip. Zand illustrated with a common scenario. “We can see on EBay that for an X Box that you had to pay a few hundred dollars, you now have to pay a couple of hundred dollars more because of that market imbalance of supply and demand. There are other issues too,” he said, including security issues and the proliferation of counterfeit chips.
Zand said manufacturers are working on building more factories to meet the demand, but such factories are few, because it’s not cheap and it’s not quick. “INTEL is investing $20 billion on a chip facility in Ohio. And other companies like Texas Instruments, they have a $30 billion chip manufacturing campus, they’re building that in North Texas. But the problem is both of these factories are expected to be online by 2025,” he said, recognizing the reality that the country will continue to suffer the shortage in the meantime.
“This is a pretty lengthy process. So it’s not something we can build and can be productive the day after it’s built. It’s one of the reasons that even major companies like Apple outsource their chips to other companies, because they’re expensive, and it’s not one of those industries that start-up, small businesses can contribute without governmental grants and subsidies.”
Even the big manufacturers will depend on help from the federal government in financing such massive projects, said Zand.
Clifford added that the solution to the crisis also involves more than just factories. “It’s not just investment in building, manufacturing, etc You have to have the work force. And the labor force necessary is a skilled labor force to put all this together, and there is a shortage of that globally, as well.”
There is a limited number of companies capable of building and staffing such an undertaking, Clifford observed. “It’s not like there’s 50, or thousands of folks who can just jump into the semiconductor business. It takes a very significant investment. And that’s also why Congress is getting involved, to figure out ways to build more in the United States to alleviate future issues.”
He added that the shortage will not end soon. “From what I understand, all of 2022 we’re gonna be in this dramatic shortage. So capacity in manufacturing, they’re working to increase it. And the demand is going to continue to go up. So I think that once capacity gets to a large enough level, to bring the backlog down to a reasonable level, we should be stabilized and not be in quite the situation we are now. I’m assuming we’re about 18 months away from that. And that’s an estimate.”
Zand’s estimate is a little more pessimistic. “I wouldn’t be surprised if it extended into 2024,” he said. “Unfortunately, I don’t think there’s a short term solution to this problem. Like I said, the INTEL plant that is planned to be built in Ohio, it’s gonna be online in 2025, so we can’t really solve this problem tomorrow.”
Clifford said if Congress truly does act, and if its actions help alleviate some of the problem, the chip industry and those that depend on it should be okay going forward. But, he cautioned, those are a couple of big ‘ifs.’