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By many accounts, the global chip shortage that rocked industries such as automotive and consumer electronics during the COVID-19 pandemic is receding. In 2022, the U.S. made an effort to assist semiconductor research and manufacturing; however, that effort comes with no shortage of political, policy, and supply and demand challenges.

Despite the potential for another rise in chip shortages, the Semiconductor Industry Association remains positive about the outlook.

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What is the global chip shortage?

Because demand for integrated circuits is greater than the supply, there's a global shortage of them. This is critical because nearly every digital electronic device today is powered by semiconductors, which contain silicon and are critical for creating ICs, also referred to as microchips. And anything that needs to compute or process information contains a chip.

A shortage in the supply of semiconductors first hit the automotive industry during the COVID-19 pandemic and has had a cascading effect, causing global disruption. The shortage can be traced back to the first half of 2020, when overall consumer demand for cars declined during the lockdown.

This forced chip manufacturers to shift their focus to other areas, such as computer equipment and mobile devices, which spiked in demand with more people working remotely. As 5G and cloud-based services grew, more chips were needed for communication platforms such as Zoom and video streaming services.
SEE: Calculate your computer hardware's depreciation
Semiconductor chips are also used in everyday appliances, as they are faster, cheaper and more efficient than the tubes and dials of older computing hardware. They enable advances in computing, communications and applications used by nearly every industry.

What caused the global chip shortage?

The rapid acceleration of the Internet of Things was one of the culprits even before the COVID-19 pandemic and " ... forever moves semiconductors ahead of oil as the world's key commodity input for growth," according to economic investment firm TS Lombard.

After consumers canceled orders early on in the pandemic, disgruntled suppliers turned to other markets that were still doing well, such as consumer electronics, and automakers found themselves lower on the priority list.

Some customers are hoarding supplies and buying more components than they need in case supply dries up. For example, companies like Huawei stockpiled supplies in advance of U.S. tech bans on China earlier this year. These actions further exacerbate supply challenges with semiconductors.

How did the global chip shortage lead to the rise in counterfeit components?

When companies find themselves in a distressed purchasing situation, they let their guard down and may not be aware right away that they've been sold illegal or counterfeit products, according to The Center for Advanced Life Cycle Engineering.

Companies have to be vigilant when they are dealing with independent distributors because they buy and sell components on online open markets, the CALCE said. Because parts can change hands various times, it can be difficult to trace the origins and credentials of the original seller.

The center advised checking the records of the company that's selling the components and conducting thorough tests on the parts, acknowledging that often businesses don't have the time to do this.

How the 2022 CHIPS Act aims to aid semiconductor industry

In 2022, the U.S. passed the CHIPS Act, which " ... has begun in earnest in 2023," according to the SIA's recently-released State of the Industry report. The CHIPS Act was enacted by the U.S. government to provide needed semiconductor research investments and manufacturing incentives and to reinforce America's economy, national security and supply chains.

The goal of the $280 billion expenditure is to prevent U.S. industries from falling prey to similar semiconductor supply chain chaos in the future.

Since last year, " ... companies from around the world have responded enthusiastically, announcing dozens of new semiconductor ecosystem projects in the U.S. totaling well over $200 billion in private investments," the SIA said. "These projects will create tens of thousands of direct jobs in the semiconductor ecosystem and will support hundreds of thousands of additional jobs throughout the U.S. economy."

Challenges faced by the semiconductor industry
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That doesn't mean things are running smoothly. Tensions between the U.S. and China continue to impact the global supply chain, for example, spurring new government controls on sales of chips to China, the world's largest semiconductor market, the SIA noted.

There are other significant policy challenges as well, such as strengthening the U.S. semiconductor workforce by reforming America's high-skilled immigration and STEM education systems and promoting free trade and access to global markets, according to the SIA.

"In addition, while the global chip shortage has eased, macroeconomic headwinds and market cyclicality have caused a short-term downturn in sales, which is projected to linger throughout the year," the organization said.

The SIA added a positive note, saying the long-term outlook for the semiconductor industry remains strong, despite the challenges.

In a push to bolster domestic semiconductor production overseas, the European Union has approved the EU's Chips Act, with the goal of producing 20% of the world's semiconductors by 2030, Bloomberg reported.

New plants at sites in Europe have already been announced by chip makers including Intel and STMicroelectronics.

Improvements in the chip supply for the automotive industry

Things are looking more promising than at the start of 2023. In terms of the hard-hit automotive industry, now mid-year, the worst of the fallout from the chip shortage seems to have settled, and the auto industry has found a new normal, according to S&P Mobility. The dearth of supply of semiconductor chips that hobbled vehicle production for most of 2021 and 2022 " ... has faded into the background - with some exceptions," the firm said.

"The auto industry has adapted to a constrained supply, and as a result, is much less likely to be hit by significant disruption," said Mark Fulthorpe, S&P Global Mobility executive director of global light-vehicle production, in a July blog post. "With the current semiconductor supply levels, we estimate that 22 million units of global light-vehicle production per quarter could be supported."

However, the firm cautioned that industry demand for increasingly complex infotainment, advanced safety and vehicle autonomy systems will continue to escalate the usage of semiconductors in vehicles.

Global semiconductor market

Although the U.S. leads the world in developing and selling semiconductors, accounting for 45% to 50% of global billings, manufacturing has shifted to Asia. Taiwan and Korea account for 83% of global processor chip production and 70% of memory chip output, and the region's lead is projected to continue to expand.

Taiwan dominates the foundry market, especially Taiwan Semiconductor Manufacturing Co., which is more commonly known as TSMC and accounted for 54% of total global foundry revenue last year.

Another chip shortage?

There are some predictions that we will see another chip shortage due to a " ... mismatch between supply and demand that cannot be addressed quickly either by chip manufacturers ... scaling up production or by markets by adapting to the chip production profile," Rakesh Kumar wrote in Fortune. "The challenge of resolving the two isn't going away - and may even grow in size."

Semiconductor demand is unpredictable, Kumar explained. AI, electric and autonomous vehicles, the Internet of Things, and 5G and 6G will drive future chip demand.

"Yet, the exact nature, speed and magnitude of that increase in demand is still unknown," Kumar wrote.

Meanwhile, Intel recently announced it will make its chip manufacturing and foundry unit a stand-alone business but remain under its corporate umbrella. Now it will compete for business like other external suppliers.

"It's expected that this change will save as much as $3B this year and continue to generate savings to Intel's bottom line going forward," wrote industry analyst Jack Gold in a LinkedIn post. "This is a major change to how Intel builds chips, and we think it's an important move that's overdue."

Intel said the move will help it achieve its stated cost savings goal of more than $8 billion to $10 billion by the end of 2025.

When will the global chip shortage end?

How long the chip shortage will last depends on who is doing the forecasting. Gartner has forecast worldwide semiconductor revenue to decline 11% this year. In 2022, the market totaled $599.6 billion, which was marginal growth of 0.2% from 2021.

IEEE predicted the supply to grow " ... from older chip fabs and foundries running processes far from the cutting edge and on comparatively small silicon wafers." In addition, IEEE estimated that more than 40 companies would increase capacity by more than 750,000 wafers per month by the end of 2022.

Even though Intel, TSMC, Texas Instruments and Samsung - the world's largest memory chipmaker - have all announced plans to build fabs in the U.S., that may not end the chip shortage. And Samsung's plant in Texas will cost over $25 billion, up more than $8 billion from initial forecasts, Reuters reported.

There is another issue: Due to a shortage of skilled engineers, TSMC's newest fab in Arizona won't be able to start mass production of 4nm chips until 2025 - a year behind schedule. According to new data from the SIA, the industry is projected to grow by more than 115,000 jobs by 2030, with 67,000 jobs at risk of being unfilled.

Expanding the supply of skilled designers and other semiconductor professionals will require a sustained effort for many years or even decades, said Tony Chan Carusone, CTO of Alphawave Semi and professor of electrical engineering at the University of Toronto.

"This talent squeeze is not unique to the semiconductor industry but rather is going to affect the entire technology ecosystem," Chan Carusone told TechRepublic. "It's estimated that between now and 2030, more than 3.85 million tech roles will be created, and 1.4 million of those roles are at risk of being unfilled. For companies who are filling semiconductor roles, creating a more robust talent pipeline should be a top priority."

The industry is " ... faced with a challenging obstacle due to the fact that chip technology is not easily visible or tinkered with, unlike software," Carusone added. "This creates difficulty in attracting young tech professionals to pursue careers in hardware and semiconductors."

He expressed hope that as one of the most important subindustries within tech, people will consider a career in semiconductors, which " ... is fast-paced, constantly evolving and can be much less volatile than a career in software."

For now, the status of increased chip production in the U.S. remains uncertain.
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Global Chip Shortage: Everything You Need to Know

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Stay informed about the global chip shortage. Understand the causes, impact on technology and industries, and potential solutions.

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