CHIPS FALL: Automakers Face Microchip Shortage

The semiconductor Industry is calling it their “chicken and egg” problem, and it’s generating a multibillion dollar headache for automakers and other industries heavily reliant on microchip technology. In essence, automakers are experiencing a shortage of the chips used in the manufacturing of today’s sophisticated automobiles, but concurrently companies that manufacture those chips are experiencing a shortage of the machines used to make them. This global shortage of semiconductor chips is fueling an all-out assault on supply chains and experts say the shortfall could continue for at least another year.

As a result, the microchip shortage is forcing major carmakers to limit production as a number of U.S. senators desperately lobby for assistance to help pick up production. Some of the larger parts producers in Taiwan have promised to increase their production of much-needed auto parts but the issue is a much deeper one and it involves a long-standing industry-wide  imbalance. Swelling demand increases over shrinking supply due to wide-ranging estimates as to when the chipmakers can address the shortage and deliver the parts consumer electronic companies need.

Estimates vary largely because of two competing manufacturing factors: the length of time required  to make a microchip (three months), and the much longer length of time necessary to make the equipment that makes the chip. Global supply shortages in the microchip machine industry is nothing new – a small group of machine manufacturers have been running on a shortage for the last twenty years. The microchip industry responds to very volatile demand behavior, and it’s not unusual to see trends demonstrate a 60% rise in one month and a 20% drop in the next. However, an additional factor involves delivery bottlenecks, where the value of orders was greater than the amount of shipments billed. This meant that orders were piling up faster than they could be shipped out.

Then, in 2018, semiconductor equipment sales began to slow as end-user demand patterns changed. Trends shifted to artificial intelligence and 5G causing server and personal computer markets to wane – and it all happened much faster than equipment manufactures were expecting. Suddenly, microchip manufacturers were focusing on new technologies and decreasing capacity deployment, making the already tricky business of gauging demand even trickier due to the rapid advances in microchip design. The more traditional pace of the semiconductor production equipment industry meant that it couldn’t keep up, and their machine products quickly became obsolete as the technology evolved.

All of this makes managing production and inventory extremely challenging. Similarly, capital investment goes up and down along with the percentage of sales revenue invested in research and development. And while billings of semiconductor production equipment went up 17% in 2020 and the expectation of new equipment sales is predicted to increase an additional 23%, that doesn’t mean chipmakers will get their equipment on time. This creates a state of severe imbalance that extends into other industries, as well. Electronic giant Samsung fears that similar shortages could begin to affect smartphones, disrupting orders for the memory chips used in those products.

Obviously, while cars are important to a country’s economic health, mobile devices are also essential for economic recovery in the wake of the coronavirus pandemic, so warnings are being taken very seriously as semiconductor foundries are unable to meet demands due to their already operating under full capacity. This leads to products being expedited in an effort to meet needs, where reallocation can focus on one industry over another, exacerbating the squeeze. And in countries left most struggling due to the virus, cars can be seen as more important to reviving their economies. In other countries, mobile chip demands lead the surge. In either case, it remains to be seen if microchip making equipment manufacturers can keep up.

Graver produces filtration products crucial for decreasing the level of defects caused by large slurry particles during the polishing process used to manufacture wafers for the semiconductor industry.