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Will the chip shortage reshape global innovation and manufacturing?

The 2020-2021 chip shortage disrupted global supply chains and led to shortages of certain goods. This will have an impact on the future of manufacturing and innovation.

The semiconductor chip shortage that is affecting the production of products ranging from cars and computers to appliances and toothbrushes will extend into years to come according to Matthew J. Murphy, the CEO of semiconductor company Marvell Technology. At the moment, there just aren't enough semiconductor chips to meet industry demand, and as a result, many popular products are in short supply.

The root of the crisis

The 2020-2021 Global chip shortage resulted from a demand for semiconductors and integrated circuits that greatly exceeded the supply possibilities. The COVID-19 pandemic led to lockdowns and companies stopping or slowing down chip production. The new home office working conditions and increased home time also led to a growth in traditional computer sales.

However, even before March 2020 chipmakers were already struggling to keep up with demand due to the tech boom and then the COVID-19 pandemic exacerbated an already precarious situation. Even now, every single end market for semiconductors is up simultaneously, putting more strain on an industry already lagging behind.

The current crisis is highlighting the rapid growth of applications that need semiconductor chips, ranging from computationally and data-intensive tasks like machine learning, to autos and everyday products, says Dr Willy Shih, Professor of management practices at Harvard Business School.

An advanced chip might have 14 billion-plus transistors on it, and hundreds or thousands of chips on that single wafer.

Willy Shih, Professor of management practices at Harvard Business School

“One of the reasons we are seeing such growth is because of the power of implementing more and more functions in software, rather than hardware. Software allows more complex functionality that would often be difficult to do in hardware, and it also allows adaptation as needs change, through updates. That would be very hard to do with pure hardware solutions,” Shih adds.

Manufacturing chips is technologically very complex, and it requires a tremendous breadth of technological capabilities. According to Shih, it is very difficult for any single organisation to have all those capabilities, so the industry has developed into an array of specialists, who each do part of the job, either as a tool manufacturer, a materials supplier, a design software supplier, a chip designer, or a chip manufacturer. Additionally, the most advanced chips need trillions of transistors at a time on a wafer, with levels of precision that are hard to imagine.

“An advanced chip might have 14 billion-plus transistors on it, and hundreds or thousands of chips on that single wafer. And the manufacturing process then might involve as many as 700 or more steps, all layered onto that wafer at the precision measured in atoms. It is probably the most complex manufacturing process known,” Shih explains.

Effects on consumption, manufacturing and innovation

From the consumption perspective, experts such as Janne Tarsa, Director of Automation & Control at Wärtsilä, expect to see a movement towards more standardised solutions for different industrial applications from the tailor-made solutions that currently prevail – or at least for some parts of the solutions. Partnering, specialisation and focusing competencies on companies’ core businesses, as well as smart make or buy strategies creation and use, are likely to increase.

“In terms of manufacturing, the COVID-19 pandemic has made it evident that long chains in chip and electronics manufacturing are fragile and prone to disruptions, where the customer and other intermediaries in the chain may not have mitigation plans,” says Tarsa.

We may see more divergence in chip innovation, design and manufacturing, as well as a change in traditional supply chains as those have shown to be fragile in times of crises.

Janne Tarsa, Director of Automation & Control at Wärtsilä

Since semiconductors are vital to all modern economies, both Shih and Tarsa expect to see a lot of investment in regionalising production because people want to have their supply chains closer, with perhaps less exposure to geopolitical risk. For example, Shih says there is already a push towards more regionalisation of production, with the U.S., Europe, Japan, and other countries are all ramping up investment. Intel recently announced over EUR 33 billion in investments in Germany, France, Ireland, and Italy, and Taiwan-based TSMC is building new facilities in the U.S. and Japan, as well as expanding its Nanjing, China facility. India has also announced a new plan to develop a semiconductor ecosystem.

A similar development might take place when it comes to innovation.

“Currently, most innovation in the chip industry happens in the US. Maybe we will see Europe growing stronger in this area and becoming less dependent on others, China may look to lessen its dependency on the US and Europe when it comes to chip design innovations, especially now with the current changing global environment it may want to be more independent in this respect,” explains Tarsa.

“It will be interesting to see if India will follow China in this and perhaps start to ramp up its chip manufacturing capability on a large scale as an alternative for China. Latin America is a wildcard, which might see opportunities to become a producer of chip innovation and manufacturing on a larger scale, not just a consumer. All in all, we may see more divergence in chip innovation, design and manufacturing, as well as a change in traditional supply chains as those have shown to be fragile in times of crises,” he adds.

Implications for future of consumption

So how will the current crisis in the chip-making industry re-shape the future of consumption and manufacturing?

Shih believes that the shortage problem is temporary and is mostly focused on older, more commoditised manufacturing capacity. Manufacturers are adding a lot of that kind of capacity, so we will see some of those shortages start to abate by next year. Those capacity additions are spread across Taiwan, Korea, Japan, Singapore, the U.S., and Europe, so that will be particularly appealing to the auto industry, which wants to feel that they are more in control of their destiny. A lot of advanced capability is being added as well, a reflection of the tremendous growth prospects ahead as more and more products incorporate sophisticated digital capabilities.

According to Tarsa, industries depending on chips may benefit from less risky manufacturing and supply chains if they are distributed more evenly around the world because they will become closer to the consumer than they are now. 

This means that unforeseen events like a worldwide pandemic or natural disasters that might affect the work of manufacturing centres will have less of a potential impact on the production of chips necessary to make a wide range of popular consumer products, which means that we could avoid shortages of goods and price hikes in the future.

Written by

Maria Stambler