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.
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.
