Why are all my chips out of stock right now?

From simple phone chargers to highly sophisticated super-computers, semiconductor chips are to be found everywhere. These tiny devices run our phones, computers, laptops, TVs, cars, and machines without us even noticing them. With this level of dependency, a disruption in the supply chain of semiconductor ICs would be catastrophic for the world economies and individual businesses.

2020: A Nightmare

2020 is the year that will always be remembered in history for chaos, fear, and disruption. The tiny little virus that started spreading from Wuhan soon took over the entire world by storm. Not knowing how to deal with the situation, most governments resorted to unplanned lockdowns. The closure of businesses, transportation, and social activities not only created an atmosphere of panic and uncertainty but also disrupted the supply chain networks at a massive scale. The effects of this disruption are felt by almost all sectors however some industries are affected more than others. The electronics industry is amongst the worst-hit ones due to these supply chain issues.

Causes of Chip Shortage

For the entire first half of 2020, almost all the major chip-producing countries (China, Taiwan, Hong Kong, and Korea) were either in lockdown or under heavy social restrictions[2]. This meant the closure of factories and shipping ports. Resultantly, the shipment of ICs and electronic components immediately came to a halt. Not being able to acquire electronic components in time, the manufacturers of electronic products either had to shut down or at least slow down their operations.

Logically speaking, now that the situation is getting normalized and production lines are running at their maximum capacities, the issue of chip shortage should be resolved. However, the ground reality is telling a different story. Electronics manufacturers are facing the worst chip shortage crisis ever witnessed. The emergence of this crisis can be attributed to several different factors. First of all, the most obvious factor is the soaring demand for electronics products. Being under social distancing restrictions, most people are resorting to their TVs, phones, consoles, and computers for entertainment and socializing. Hence, the demand for consumer electronics has gone high. The growth projection of consumer electronics for the first quarter of 2021 is around 12% which is more than impressive[3].

The second cause of chip shortage is the phenomenon of phantom demand - an artificial increase in demand due to hoarding and stockpiling[4]. It is estimated that hoarding is a major contributing factor in the present global chip shortage crisis. Tech giants like Huawei, Samsung, and Apple have been accused of hoarding chips in large quantities to save their supply chains from disruption. However, it is not only the tech-giants who are stockpiling. Suppliers and manufacturers of chips in Asia are also holding back their stocks in hopes for higher returns due to the ongoing demand spike. Currently, mobile phone components are the most difficult to come by. Smartphone manufacturers are not only competing for components among themselves but also with the manufacturers of tablets, laptops, and game consoles.

In addition to the short-term factors like high demand and hoarding, long-term factors like changing market trends are also fueling the chip shortage crisis. As the paradigm of Industry 4.0 is getting a lot of traction, manufacturers are forced to increase the level of automation and digitization in their products[5]. In today’s highly competitive market, innovation is strongly tied to profitability. Therefore, all the sectors within the electronic industry are moving towards digitization at the same time which is causing an increase in the demand for ICs. Talking about changing market patterns, it is the automotive industry that is going through the most radical transformation at the moment. The widespread popularity and soaring demand for electric vehicles are reflective of that transformation. Electric vehicles are now quickly moving in the direction of fully autonomous vehicles. Such vehicles incorporate multiple highly sophisticated electronic sub-systems which are implemented using high-performance chipsets. Therefore, a significant percentage of manufactured chips are consumed in the automotive sector. This high dependency on semiconductor chips has created a massive problem for the auto sector where many companies are shutting down their plants due to supply chain issues and chip shortages. The chip crisis could not come at a worse time for the auto industry. The demand for cars is bouncing back after the pandemic slump and the car manufacturers have to miss out on the opportunity to make good profits.

Another major reason for the chip shortage crisis is the international geopolitical situation. Many Chinese companies have resorted to blaming the US government for this crisis[6]. According to Huawei, the sanctions on Chinese companies are the major cause of chip shortage. According to the company, most of the manufacturers are resorting to stockpiling because of the uncertain situation created by the sanctions on Chinese firms.

Whatever the reasons behind the chip shortage crisis, it has taught many valuable lessons to the manufacturers and policy-makers. First of all, depending on a select few suppliers for components is not a good strategy for any manufacturer. Secondly, supply chain processes need to be made more efficient by using new technologies and devising better trade policies. Through proper planning and effective management, crises like this can be avoided in the future.

How to Manage Your IC Inventory and Remain Crisis-Proof?

No doubt the situation is dire and companies are struggling to get hold of chips and components. Nonetheless, with proper management and planning, the situation can be managed and risks can be minimized. Here are some measures which you can take to dodge the chip shortage crisis.

Parts before PCB

If you are about to assemble a newly designed PCB, make sure to order all parts on your BOM before heading for PCB production. If the components are out-of-stock then the PCB design can be modified and alternative components can be sourced.

Inventory

Order the most frequently used components (especially MCUs) in sufficient quantities so that you don’t run into trouble under uncertain circumstances.

Datasheet Websites

Take advantage of component sourcing websites like octopart.com and oemsecrets.com for searching alternative suppliers and distributors.

Alternatives Parts

If a required part is unavailable, check datasheets and distributor websites for alternative part numbers of the same chip which might refer to earlier versions, different device packages, or different temperature ranges.

Where there’s a will, there’s a way. The chip shortage crisis is serious and businesses are suffering because of it. Nonetheless, with some out-of-the-box thinking and proper management, you can safeguard your supply chain and minimize the operational risks.

Conclusion

Semiconductor chips are the drivers of machines and devices which run our world. Without these chips, it is not possible to create any electronic or communication device. The global pandemic has severely affected all areas of life including business supply chains. The electronics industry is facing the worst supply chain crisis at the moment where manufacturers of consumer electronics and vehicles could not acquire the needed parts and chips. Multiple reasons have contributed to this crisis. The first reason is the soaring demand for consumer electronics and cars after the pandemic-led demand slump. The second cause is the hoarding and stockpiling of components by large companies and suppliers. Another cause is the increasing level of automation and changing user trends. Finally, US-China relations are a major contributing factor in this chip shortage crisis. Only by addressing the logistics, technical, and policy issues, such crises can be dealt with effectively.

If you need help with your supply chain or need to re-spin a product quickly because of a missing part, please get in touch: www.octanis.ch/en/contact