Semiconductor chip market: Why is there a surplus, while there is a shortage?

Recently, everywhere people have heard news about the shortage of semiconductor chip supply. Experiencing a series of economic events, the market is now flooded with this type of component.

Causes of excess

One of the reasons for the current oversupply of semiconductors is the panic and hoarding of the past when the COVID-19 pandemic started. Manufacturers of phones and computers hastily collected a large quantity to use gradually. Since then, semiconductor chip companies have also tried to produce as much as possible to fill demand.

Recently, the epidemic situation has eased. Workers started returning to the office and chip factories were able to gradually restore their old productivity.

However, because they had previously hoarded a large amount, the phone and computer companies had no need to order more. This is bad news for chip manufacturers and they are forced to be more cautious in doing business. The market is going down, so many companies like Intel and Qualcomm have to suspend recruitment or even lay off employees to save money during difficult economic times.

In addition, the semiconductor chip industry also follows certain cycles. The phased rise and fall is associated with the state of demand for volatile electronic products, such as smartphones. Normally, consumers can shop aggressively, but in a period of high inflation and volatile energy prices like the present, they see no need to buy in exchange for new and more modern phone models. When purchasing power went down, manufacturers were forced to adapt.

During the past decade, there have been several such ups and downs in the global semiconductor chip market.

Usually, in the holiday period of the last and first months of the year, consumers want to buy more electronics. But this year, this demand does not seem to be increasing at all, if it does, it will be slower than during the pandemic.

Another reason contributing to this situation is the CHIPS law that the US just enacted this summer to boost domestic semiconductor chip production. According to the Wall Street Journal, the US government has provided $ 39 billion to build more chip factories in the country.

The auto industry is a special case

However, this is not the case with all manufacturing industries. The auto sector still faces the risk of shortages until 2023. Recently, Toyota even had to cut production due to a shortage of chips.

The reason is due to phase difference in technology. Semiconductor chips used in automobile manufacturing are mainly produced on old generation lines.

According to a McKinsey report, the automotive industry mainly requires 90nm or larger chips, even though this generation of chips has been around for 20 years. Automotive components are not yet integrated with cutting-edge technology. Switching to next-generation chips is a long and expensive process, so automakers are still hesitant.

Statistics and forecasts by McKinsey on chip demand in the automotive market, in nanometers, in million units.

At the same time, to produce 90nm or larger chips, the factory also has to use old equipment. However, because profits are not high, they are not motivated to invest in increasing capacity.

Before the pandemic, the production capacity of these chips was already low. In just two months of 2020, when auto factories almost closed mass, OEM companies also withdrew orders. At the same time, the boom in demand from other sectors has drained all available chips. By now, when automakers are rushing back to the market, it’s a bit late.

In general, the demand for semiconductor chips in the long term will still be strong. However, in the short term, sometimes there will be sudden waves of change like this.

References from: McKinsey, WSJ