Supply-chain disruptions have hurt certain sectors more severely than others, leading to a massive supply crunch in a few major industries. One such industry that has suffered the wrath of supply-chain snags is the chip sector. The beginning of a slowdown in the chip sector started with the pandemic. However, the issue has soon been exacerbated by supply constraints faced worldwide.

As manufacturers worldwide were examining the economic impact of the pandemic, semiconductor and chip production was put on hold. While supplies were allocated to other customers, demand resumed to full capacity as soon as lockdowns were lifted. These supply limitations reduced the pace of growth of production, leaving a high level of unfulfilled demand among consumers.

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What resulted from this was an unexpected surge in semiconductor and chip prices and a breakdown of large industries that use chips as an intermediate good. Consequently, manufacturers of cars and computers have seen massive losses and have outlined large waiting periods for their customers.

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Why has chip demand outpaced its supply?

Consumer spending took off quickly after lockdowns and restrictions were lifted. However, interest rates remained at all-time lows, making borrowings less costly for individuals. As a result, demand for manufactured goods, such as smartphones, cars and computers rose on the back of heavy stimulus provided by central banks. These industries are heavily dependent on semiconductors and chips, which are currently facing supply-side bottlenecks.

Semiconductors and chips are considered intermediate goods in many other industries, such as micro controllers, optocouplers, power relays, switches, varistors and many other appliances. Experts suggest that the existing gap in demand and supply of these goods could continue to last through 2022 and into 2023. Ultimately chip manufacturers have resorted to hiking the price of their products, which is factored into all those industries that use chips are intermediary goods.

Broadly, the chip industry has faced issues in shipments, and related transportation costs have also risen. Freight rates have surged owing to the supply-chain disruptions, and rising commodity prices have also played a role in raising fuel costs. Moreover, at the ground level, raw materials required to process chips and semiconductors are also becoming more expensive due to inadequate supply.

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Is there a solution?

Chip shortage has affected more than a hundred different industries for over two years now. Even crucial sectors such as healthcare have been adversely impacted by chip shortage. Essentially, anything that is electronically augmented requires a chip to function.

Many experts have warned consumers and manufacturers that this is the perfect time for counterfeit chips to be circulated into the system. Moreover, healthcare items and goods used in everyday life should be carefully examined before they are used.

The US might be closer to a resolution than many as the Members of the House and Senate are in the process of negotiating a version of the Bipartisan Innovation Act bill. If passed, the bill can provide significant impetus to the chip manufacturing sector in the US. The bill would spend over US$52 billion on chip production and research in the country. This might help prevent future shortages and maintain a robust supply of chips even during adverse circumstances.

Overall, it would take a few months before chip production is brought back into full swing and prices come back down. Consumers can expect car manufacturers and other chip-related producers to keep their prices high for some time. Large delays in shipment can also arise due to the current problems.

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