Global Chip Shortage Situation

In Context 

• The Russia-Ukraine conflict is likely to aggravate the global semiconductor shortage as the two countries are major suppliers of raw materials critical to chip production.

  • Russia supplies the global semiconductor industry with rare metals, and Ukraine supplies specialty gases required by the chipmaking industry. 

Major causes 

• After reaching its peak in 2011, the laptop market growth slowed down with the rise of alternatives such as smartphones and tablets. 
• Then, the pandemic hit. People switched to work from home, children connected to schools through laptops, and get-togethers happened over video calls.
  •  This shift led to a surge in demand for laptops and tablets.
• The stay-at-home rules also made several people pick up console-based gaming. 
• The supply of chips for vehicles and electronic goods have been under tremendous stress for the past year because of the pandemic.
• The ongoing war might have massive ramifications in the already acute semiconductor chip shortage scenario.
• A lingering conflict between Russia and Ukraine can quickly exhaust thin semiconductor inventories, disrupting production worldwide and affecting the fragile global economic recovery.
  • Neon and helium are both gases critical to the production of chips, and Russia and Ukraine are both major players in the global supply chain—so much that neon prices went up more than 10 times following the Russian annexation of Crimea in 2014.
• According to a report by Moody’s Analytics, Ukraine supplies rare gases used to produce semiconductor fab lasers, and Russia exports rare metals like palladium to make semiconductors. 
  • This combination is required to build chipsets that power a range of devices, from automobiles to smartphones.
• Russia and South Africa are the two largest producers of palladium. In 2021, Russia supplied 2.35 million ounces (66 million grams) of palladium.
  • The silvery-white market would move into a severe deficit without those supplies, pushing the price up. While platinum and rhodium could be substituted for palladium, Russia is also a leading producer of the other platinum group metals.
    • Palladium is used in nearly all electronic devices, and the metal is a key to make chipsets and circuit boards. It is used to make multi-layer ceramic capacitors (MLCCs), which are important to make smartphone screens, stereo systems, and power circuit breakers.
    • Palladium is often used as an alternative to gold in making various devices as the metal is highly malleable and resistant to corrosion. 

Implications

• The stress could potentially impact the manufacturing of automobiles and electronic equipment in the Asia-Pacific region.
• The iron ore, semi finished iron and iron bars are among the four largest commodities imported by the Asia-Pacific region  from Ukraine.
•  If the Russia-Ukraine conflict drags on, chipmakers in Taiwan, South Korea, Japan, China and other countries will feel the impact. 
  • This will likely result in higher chip prices and longer lead times moving forward.
• Some companies have reportedly started discarding features and high-end electronic capabilities on a temporary basis to deal with the chip shortage. 
• India :
  • India is worried about the impact of the war between Russia and Ukraine on the country’s trade with the two neighbours.

How are businesses and governments adapting to these changes?

• The global semiconductor market is projected to grow by 8.8% to US$ 601 billion, driven by a double-digit growth of the sensors and logic category, according to data from World Semiconductor Trade Statistics (WSTS).
• And with the recent trends in electric mobility, automotive safety, and Internet of Things (IoT), the demand for semiconductors is only going to grow.
  •  But this growth is coming at a time when products are being built on global supply chains. So, businesses are investing their offshoring plans. 
    • They are considering ‘reshoring’ as an option to be shielded from global supply chain disruptions.

• Reshoring production can create improvements that may help in the event of a shortage. 
• For one, it is much easier to control production aspects like quality and control processes for onshore manufacturing. 
• There are also fewer governmental restrictions when production is held onshore. There are also benefits for the local community when manufacturing is done locally.

• The U.S. government is looking to pass the CHIPS Act, a law that would provide semiconductor firms with $52 billion in subsidies to advance chip making in the country.
• At the other end of the spectrum is government support to provide a conducive environment for businesses to set up facilities to build semiconductor factories.
• India recently cleared a ?76,000-crore scheme to incentivise companies to design and make semiconductors.

Conclusion & Way Forward 

• Business strategies and government policies could help in solving the chip crunch in the long-run, the current semiconductor shortage is here to stay with us in the near-term.
• The present shortage of inputs, especially semiconductor chips in the automobile industry seems to be a temporary phase. Various initiatives of the government like Production Linked Incentive scheme will provide a much needed trigger.
• The Prime Minister’s call for an ‘Atmanirbhar Bharat’, have rejuvenated hopes of a rise of the indigenous electronics industry, gradually allowing India to be truly self-sufficient.
• Recently ,the government had stressed the need for India to be self-sufficient in critical areas such as semiconductor manufacturing as the pandemic and rising geopolitical tensions exposed the fragility of global supply chains, adding that India has committed almost $10 billion to promote semiconductor manufacturing in the country.

Source:TH