Written by Jimmy Hefter
The COVID-19 pandemic took a toll on our jobs, our mental health, our family connectivity, and a 14 nano-meter semiconductor chip. One would think a shortage of semiconductor chips would be benign, but the current situation is all from that. The global semiconductor shortage caused by the pandemic has been occurring for over a year now, and consumers are paying the price by relinquishing a major aspect of their lives: time. The delays on these minuscule chips have been astronomically long, as companies are suffering to produce their electronics and goods on time. The global supply chain network is completely out of sync, as “Factories and retailers in Western economies that have largely emerged from lock-downs are eager for finished products, raw materials and components from longtime suppliers in Asia and elsewhere” (Yap, Boston, and MacDonald). However, countries in Asia are suffering. They are still experiencing economic hardships due to lock-downs. Confusion is running rampant throughout the world, and it is hitting electronics producers and consumers the most, especially in the United States.
The semiconductor industry is a massive one, totaling $464 billion. The loss in revenue of this industry will in turn cause major ripple effects upon other industries, such as the car and home electronics industries (Yang, Sohn). For example, the smartphone industry relies heavily on semiconductor chips, so it will grow only by 6%, when the forecast from the beginning of 2021 was around 12% growth (Yang, Sohn). These woes majorly influence the labor industry, as people are trying to come back to work after an isolated year.
The producers of these semiconductor chips blame the lack of resources for the delays and ultimate loss of revenue. Pat Gelsinger, Intel’s Chief Executive, claims that there would be mass production, but there are massive issues with other aspects of the chip. He forecasts that the shortages and these occurring issues will continue until 2023 (Yang, Sohn).
This figure from the Wall Street Journal describes this shortage perfectly. Over time, consumers have been spending more time waiting for chips. According to this figure, the delay for October is 21.9 weeks for semiconductor chips, stagnating sales and revenue. Firms are majorly suffering from this global crisis.
To fully understand the ramifications of this shortage, it is important to delve deeper into the economics of the issue. Since there is a shortage in inputs, as Mr. Gelsinger noted, this affects the supply curve of the supply & demand function. Inputs are part of the supply of goods and services, so this will majorly decrease, therefore driving the price of semiconductor chips up. We can see this through the graph below, displaying the decrease in supply from s to s1 (Reed). As you can see, with this change in supply due to less inputs, there will now be a higher equilibrium price and a lower equilibrium quantity. For example, PowerX, a utility-monitoring devices firm, paid almost five times more to get less chips (Yang, Sohn). Because these firms are paying more, there are heightened costs that will not be made up by revenue, leading to economic downturn. Another company, Royal Philips NV, stated that their sales and profit for this year will be completely down, losing around $174 million in missed sales in the third quarter (Yang, Sohn).
The car industry is bearing the brunt of this shortage, as “General Motors Co. and Ford Motor Co. each reported steep drops in third-quarter profit as the computer-chip shortage dented factory output” (Yang, Sohn). There are challenges in meeting customer demand, so there is a loss of revenue. Customer demand is a crucial piece of this puzzle as the industry’s issues date back to the beginning of the pandemic in 2020, where suppliers halted chip orders because they were concerned with lower demand (Colias). Peter Anthony, chief executive of a Chicago-area supplier, recently cut his volume projections for the first half of next year by 20%” (Colias). This is purely an estimation, due to the overall volatility of chip orders and general availability. The precarious nature of the chip market is causing the automotive industry to lose an enormous amount of money, some $210 billion in revenue, according to AlixPartners LLP (Colias). There are claims that this supply chain fiasco can take many years to overcome, as the automotive industry relies heavily on factories in Asia to produce these chips. The chip producers are planning on opening up new factories to increase production, but opening up a factory is a long term investment, taking years and billions of dollars to establish (Yang, Sohn).
Semiconductor chips are present in almost all of our goods that we use regularly on a daily basis, so this shortage affects the entire world. Companies will have to make tough decisions on labor and allocation of funds due to the major losses they are undertaking. It will be fascinating to see how this economic disaster plays out, and how firms will recover in the future.
Works Cited
Colias, Mike. “Car Companies Buckle up for Extended Chip Shortage.” The Wall Street Journal, Dow Jones & Company, 30 Sept. 2021, https://www.wsj.com/articles/car-companies-buckle-up-for-extended-chip-shortage-11633005657?mod=article_inline.
Reed, Jacob. “Supply & Demand Market Equilibrium – AP/IB/College.” ReviewEcon.com, 8 July 2020, https://www.reviewecon.com/market-equilibrium.
Yang, Stephanie, and Jiyoung Sohn. “Global Chip Shortage ‘Is Far from over’ as Wait Times Get Longer.” The Wall Street Journal, Dow Jones & Company, 29 Oct. 2021, https://www.wsj.com/articles/global-chip-shortage-is-far-from-over-as-wait-times-get-longer-11635413402?mod=djemRTE_h. Yap, Chuin-Wei, et al. “Global Supply-Chain Problems Escalate, Threatening Economic Recovery.” The Wall Street Journal, Dow Jones & Company, 8 Oct. 2021, https://www.wsj.com/articles/supply-chain-issues-car-chip-shortage-covid-manufacturing-global-economy-11633713877?mod=article_inline.