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- Anything that relies on computers (cars, phones, appliances, etc.) has been facing production issues of late due to the shortage of chip supply.
- Today, the world runs on chips—a modern car can have up to 100 of them; a phone has about a dozen.
- Simply put, a chip is a flat piece of siliconOr any other semiconductor such as germanium or gallium arsenide. that has several electronic circuits on it.
- A trillion (1012) chips are made every year but making a chip is a very lengthy and complicated process.
- It takes about 2-3 months to make one chip—a piece of silicon has to go through 3000 steps.
- And chip-making involves giant factories, dust-free rooms, multi-million-dollar machines, and a daily supply of tons of ultra-pure water.
- These factors mean long lead times (orders must be placed well in advance for an uninterrupted supply) and a high entry barrier (not easy for a new player to enter the industry).
- With these industry-specific factors, there are a few events that have led to the crisis.
- Event 1: COVID.
- At the start of COVID, many companies pulled back their chip orders, thinking that slowing economies would slow down the sale of electronics, cars, gadgets, etc.
- But people—stuck at home—having saved money that they otherwise would have spent on vacations, travel, eat-outs, went on an online shopping spree, causing an increase in demand.
- Event 2: US-China Trade War.
- During the US-China trade war (2018-20), the US government made it difficult for American manufacturers to buy chips from China.
- These companies turned to Taiwanese and Korean companies, which were already operating at maximum capacities.
- Event 3: Drought in Taiwan.
- A big chip-making company can use up to 60 million litres of water a day, and when a bad drought hit Taiwan in early 2021, it severely impacted the chip production.
- Event 4: Fire in Renesas chip factory in Japan in March 2021.
- Renesas is a major chip supplier to car manufacturers (makes 1/3rd of the global micro-controller chips for cars); a fire in its factory sent it out of operation for over 100 days.
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