Little did the world foresee the extent of imbalance the shortage of semiconductors would cause across industries. Nearly two years after the pandemic struck, companies witness the harshest last quarters of the year, as manufacturers ramp up production of chips that don’t meet their demand by a long shot.
Computer microchips, also known as semiconductors, are vital components used exponentially across industries, globally. The dependence on semiconductors spans industries far and wide as they are either directly used in electronic devices or are required by machines to produce non-electronic products as well. What started as a tiny ripple effect of the pandemic on companies with respect to the availability of these microchips, has now caused a strong shockwave globally where their supply is concerned.
With a soaring demand for electronics during the pandemic that required the world to adjust to a work from home setup, devices such as tablets, monitors, televisions, and even gaming consoles were up for grabs. What companies were not prepared for was the imbalance this demand would cause to the supply chain of semiconductors. The Delta variant, China’s zero tolerance policy towards Covid-19 which led to closures, unavailability of raw materials, geo-political policies, etc., are some factors that directly lead to a record rise in chip lead time – the period between ordering and receiving semiconductors. What took six weeks to deliver chips, now took 21 weeks in August.
Industries that have taken a hit
The automotive sector has taken the biggest contraction with global brands like Jaguar Land Rover (JLR), Tesla, BMW, General Motors and Ford projecting to forfeit $110 billion in sales this year alone. Car manufacturers worldwide have been compelled to slow down or completely stop production; with Maruti Suzuki reducing its output by 60%, and Toyota by 40% in September 2021.
Besides, consumer electronics and appliance industries have suffered losses too. From phones, laptops and printers to refrigerators, microwaves and dishwashers, companies are struggling to meet demands. This indicates the widespread use of microchips and how the break in their supply has caused a terrifying domino effect worldwide.
What does this mean?
To simply put, not only will consumers have to wait a longer time to get their orders but will also have to pay more to compensate for the price hikes that have been a direct consequence of this break in supply chain of chips.
The road ahead
World leaders and heads of multinational companies understand that this could span well into 2023 before showing signs of normalcy again. In a race to salvage production, industries are on a war footing to step up production of chips and reduce dependence on single sources of supply. Taiwan Semiconductor Manufacturing Corporation (TSMC) holds 56% of the foundry business of manufacturing chips and is the world’s largest contract chipmaker. However, this process is long and tedious and will have its own implications; a decision that remains to be seen by industries worldwide.
What’s in it for manufacturers and retailers?
As this timebomb continues to tick, manufacturers have approached administrations of their countries to subsidize semiconductor production. That apart, TMSC has added $28 billion to its capital spending budget for 2021 as well. Company strategists are prioritizing policies on stock management and risk management to be more prepared should there be a next time. As for retailers, the use of mitigation strategies to plan ahead and move up their peak shipping time has been the need of the hour. The mantra “buy now or wait indefinitely” is here, as retailers help customers but also prepare to witness a shopping season very unlike the recent past.
Independent Consultant for Market Research, Data Science and Analytics
PredictiVu Pvt Ltd