Shortage of semiconductors: nearly 8 million fewer cars in 2021

Shortage of semiconductors: nearly 8 million fewer cars in 2021

Shortage of semiconductors

The Covid-19 pandemic that began a little less than two years ago has created a whole series of problems and difficulties that have gone far beyond the most immediate and important social and productive sectors, such as inter-personal health, the health sector and local economy, areas that are immediately and easily perceived by all of us. As a result, there are many production sectors that have suffered a setback. One of these is the sector related to mining and semiconductor production: the famous chips.

Chip Tesla It must be understood that the main world source linked to semiconductor production is located in Malaysia (about 79% of global production), and supplies all the biggest leaders in the IT and Automotive sector, such as Stellantis, Volkswagen, Toyota and Ford, Microsoft and</a> Samsung.

The brake given by the pandemic in the production chain of this very important component, which is the basis of every electronic circuit, and the shortage of raw materials, such as aluminum, steel, plastic and resin, has given a bad blow to the automotive sector, with prevalence in the EV segment.

Mining for the extraction of silicon and its derivatives AlixPartners, an American consultancy company, has already decreed a decline in global production of electric and non-electric vehicles in recent months. 3.9 million units per year, estimate increased in recent days to 7.7 million units per year.

The data is justified by an increase in the average costs on raw materials, mentioned above, borne by manufacturers of vehicles, and the total absence of what companies define "economic shock absorbers", that is a whole series of internal economic and administrative strategies that allow to buffer any fluctuations in the costs of raw materials, marginalizing in other economic sectors.

In other words, everything turns into an increase in average costs on the market, and an inevitable decrease in the production of the vehicles themselves, placing the market in a situation of (albeit slight) recession.

Chip shortage: Here's why the semiconductor industry gets into trouble predicting the future

The chip industry is in a constant struggle in predicting demand and that means regular chip shortages every few years and a boom-and-bust market that continues despite access to massive amounts of economic data.

I used to cover the chip industry for several news publications, for more than two decades and the same pattern of boom-and-bust cycles would repeat itself separated by four or five years. And each time it happened, chip makers vowed it wouldn't happen next time because this time their forecasts would be far more accurate. And each time they failed they said next time we'll get it right.  It's a tradition that continues to this day. 

Which makes me wonder: How bad is the chip shortage that we hear about? And just how long will it last? And can we trust predictions of a long shortage? 

Because looking back at the chip industry with a multi-decade view I would say that we'll likely see the same as we always see in the industry: a sharp rise in demand followed by an equally sharp fall. A classic boom-and-bust scenario.

For example: Just last year the Semiconductor Industry Association (SIA) released its mid-year 2020 report and it was gloomy.

'Following record sales of $468.8 billion in 2018, global sales in 2019 decreased by 12 percent to $412.3 billion'. The SIA said 2020 sales would be negatively impacted by the COVID-19 pandemic with a modest rise in revenues predicted for 2021. 

But the chip market came roaring back this year and there is nothing modest about monthly growth in chip revenues of 26 percent and above, year-over-year. 

The semiconductor industry is now predicting lengthy chip shortages as chip revenues boom in 2021 -- extending into 2022. 

However, this prediction is likely just as unreliable as prior ones and the reason is that it is incredibly hard to figure out true chip demand.

It is even harder during times of shortages because customers are double and triple ordering, and trying to gain supplies through any means possible. This creates a certain level of fake demand which disappears as soon as supplies rise. It's difficult to unravel the true chip demand.

It's a big problem for the chip makers because making chips takes at least 6 months and once you've started you cannot stop. And you have to run your chip fabs at near full capacity otherwise the operating costs are unsustainable.

And because the chip fabs make massive use of scale: in terms of the largest wafer sizes and the smallest chip features -- just one of today's state-of-the-art fabs has the capacity to produce massive numbers of chips surpassing the older generations of fabs.

The economics of the chip industry require chip fabs to be continuously producing chips at near full capacity.  You cannot slow down a production line because demand has fallen. You have to keep producing chips.

The only way chip companies can cut production is by not building another multi-billion dollar fab. 

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And this is why we have a chip shortage yet again. Chip companies have to get their investment timing just right because a capital expenditure of several billion dollars has to be put to work as quickly as possible. Companies can stop fab construction and resume later but they cannot stop it once it is up and running. 

And every new fab produces a massive amount more chips than prior fab generations. Productivity has advanced at around the speed of Moore's Law for more than 60 years. 

Invariably, the chip industry gets its forecasts wrong and over-invests in fab capacity and suffers a 'bust' market. And chip prices plunge because of the massive abundance created by the latest fabs  -- which cannot be turned off. 

It may be tough times for chip makers, but a flood of cheap chips is a bonanza for every type of electronics company and digital device inventor. It fuels innovation and the chip miniaturization fuels performance as chips become faster, use less power, and become less expensive. And in plentiful supply.

This current chip shortage might be shorter than the chip industry expects and if they do over-invest in production then that will drive the next big chip user boom. Whatever that will be. 

This shows how the chip industry is incredibly fundamental to the health of the entire tech industry and nearly all other industries.