ECONOMICS OF SEMICONDUCTOR SHORTAGE CRISIS

SUBMITTED BY

Kunal Kalita-SM0121032

FACULTY IN CHARGE

Mrs. Dipakshi Das

Assistant Professor of Law

NATIONAL LAW UNIVERSITY AND JUDICIAL ACADEMY,

ASSAM

1
 TABLE OF CONTENTS

CONTENTS……………………………………………………………….PAGE NO.

1. INTRODUCTION……………………………………………………………3

1.1 LITERATURE REVIEW………………………………………………...4

1.2 SCOPES AND OBJECTIVES…………………………………………...5

1.3 RESEARCH QUESTIONS……………………………………………....5

1.4 RESEARCH METHODOLOGY………………………………………...5

2. WHAT ARE THE CATALYSTS OF THE GLOBAL SEMICONDUCTOR

SHORTAGE?....................................................................................................6

2.1 STRUCTURE OF THE SEMICONDUCTOR INDUSTRY…….……….6

2.2 THE EFFECT OF COVID-19 ON THE SEMICONDUCTOR

SUPPLY CHAIN…………………………………………………………7

2.3 ECONOMICAL IMPACT OF THE SEMICONDUCTOR SHORTAGE

FROM THE PERSPECTIVE OF THE US AUTOMOBILE INDUSTRY..8

3. HOW SHOULD THE MICROCHIP INDUSTRY MITIGATE THE

SEMICONDUCTOR SHORTAGE……………………………………………13

4. CONCLUSION……………………………………………………………….16

5. BIBLIOGRAPHY…………………………………………………………….17

2
 1. INTRODUCTION

Production disruption is a form of supply chain disruption that can have serious repercussions.
Supply chain disruption has become a serious concern across businesses. Semiconductor or more
popularly known as “Chip” shortages have caused car production to halt, consumer electronics
product launches to be delayed, and firms' ability to hire new employees to be restricted.
Manufacturers have challenges as a result of the semiconductor chip shortage, particularly in
industries that rely on semiconductors, such as the computer, electronic, electrical equipment,
and automotive industries.The semiconductor shortage was caused by a slew of issues.The
pandemic has exacerbated semiconductor chip shortages. In addition to long-standing industry
difficulties including limited capacity at semiconductor fabs, the COVID-19 pandemic presented
unique obstacles. Due to a global chip shortage, global manufacturing companies are scrambling
to adjust their supply chains in order to avoid scarcity, delays, and inflation. Cloud computing,
cryptocurrency mining, and the wide range of "smart" goods that require semiconductors
(combined with a market for them that grew during the epidemic) have all contributed to the chip
shortage, and the lack of a single reason makes it difficult to resolve. As a result, there has been a
need for further investment in domestic semiconductor manufacturing to reduce reliance on
foreign supply networks.This research explores the disparity between rising worldwide demand
for semiconductors and restricted global supply .In this Commentary we study the impact of one
bottleneck i.e; semiconductor shortages—on industrial production dependent on semiconductors
and the methods for mitigating supply chain disruption in the near future to avoid “
Chipageddon”.

3
1.1 LITERATURE REVIEW

Coronavirus: Implications for the semiconductor industry April 14, 2020 |

Article By Harald Bauer, Ondrej Burkacky, Peter Kenevan, Abhijit Mahindroo, and Mark
Patel - The article gives a terrific insight into the intricate details of the implication of covid on
the semiconductor industry and how the industry should recover from this slump and prepare for
life in the post-covid era.

Kristoph Naggert, Pawel Krolikowski, et al. “Semiconductor Shortages and Vehicle

Production and Prices.” Website, www.clevelandfed.org, 8 July 2021- This particular article
delves into how during the COVID-19 epidemic a global semiconductor shortage hampered US
automobile production. The article examines the impact of one bottleneck 'semiconductor
shortages' on vehicle manufacturing and new car costs, as well as whether these impacts are
transient.

Attinasi, M. G., De Stefani, R., Frohm, E., Gunnella, V., Koester, G., Tóth, M., &
Melemenidis, A. (2021). The semiconductor shortage and its implication for euro area
trade, production and prices.- The paper gives us a good picture of the misalignment between
the spike in global semiconductor demand and the limiting global supply. The euro area's
manufacturers are being hampered by a scarcity of semiconductor chips, particularly in
industries that rely on semiconductors, such as the computer, electronic, electrical equipment,
and automotive industries. There is currently only minimal evidence on the effects of
semiconductor shortages on eurozone price pressures.

4
1.2 SCOPES AND OBJECTIVES

The scope of this project has been vastly narrowed down to enhance the quality of research. The
contents primarily address the structure and functionality of the semiconductor industry and its
ensuing shortage crisis. It begins with a detailed overview of the significance of semiconductors
in contemporary time and its supply chain disruption during the pandemic led to massive
disturbance in the equilibrium of various industries.

The objectives of this project can be laid down as follows:

● To paint a comprehensive picture on the importance of semiconductors and study its

manufacturing industry
● To elaborate on the economical impact of the semiconductor shortage from the
perspective of the US Automobile Industry.
● To understand and analyse how the semiconductor industry will mitigate through the post
covid era.

1.3 RESEARCH QUESTIONS

1. What are the catalysts of the global semiconductor shortage?

2. How should the microchip industry mitigate the semiconductor shortage?

1.4 RESEARCH METHODOLOGY

The project is written and compiled entirely by qualitative modes of research. To solidify the
contents of this project and because of the nature of the subject of the topic, the researchers have
depended on secondary data like journal articles, websites and research papers and have sought
to understand and analyse the pertinent topic.

5
2. What are the catalysts of the global semiconductor shortage?

Many firms and consumers hurried to buy PCs and tablets, where semiconductors are a key
component of their mechanics, in unprecedented numbers during the lockdowns and the big
move to work from home. Additionally, with schools closed, demand for already scarce gaming
platforms grew. Parallel to this, automobile industries, who make up a large part of the
semiconductor industry's client base, cancelled their backlogs and decided to burn through both
finished items and semi finished inventory to manufacture what they could. Due to poor demand
and COVID safety concerns, the semiconductor industry was obliged to operate at a substantially
lower capacity, resulting in historically low utilisation rates. The automobile market began to
recover in September 2020, and orders began to flow in, but OEMs and Tier 1 suppliers had
depleted their inventory. The entire supply chain was devoid of goods. There were no parts
available, but there were plenty of orders. A panic erupted, resulting in duplicate bookings.
However, the main automotive broadline providers, including ST, Infineon, ON, and NXP, have
already reduced production, and the period to restart manufacturing and deliver parts is measured
in months. To make matters worse, the weather in Texas hampered manufacturing at TI, NXP,
Infineon, and Samsung. Another panic ensued due to the power disruptions. The Renesas fire
halted manufacturing for at least six weeks, with many automotive and critical microcontroller
products affected. Taiwan was likewise concerned about a possible water shortage. All of this
created panic in the market, prompting clients to try even harder to raise their orders. Finally, this
is the worst downturn in the industry since 2008-09.

2.1 Structure of the semiconductor industry

A company's market share is a vital success factor when looking at the industry structure. No
single company controls more than 15% of the market in this industry. It's disjointed, and no
single body is in charge of all applications. Samsung can give appliance parts, while Hynix can
provide cloud computing memory. However, a corporation cannot construct a system without
power components or microcontrollers from Renesas, ST, or NXP. Even if one source has the
majority of the parts, some may be missing. Qualcomm and Broadcom can be adequately served
by TSMC, but it's hard to sell a product if consumers can't buy MOSFETs from ST or

6
microcontrollers from Microchip. Although the essential technologies exist, no one has enough
market share to ship the whole bill of materials for any given system. The sector is consolidating,
but at a snail's pace, so it remains fragmented and specialised, exacerbating interdependence.
Global supply chains are vulnerable. Firms have attempted to improve production by
implementing just-in-time and lean processes, which reduce working capital and consequently
inventories. They've gotten incredibly efficient and are designed to lower expenses indefinitely,
but they're extremely vulnerable to catastrophic catastrophes.
Customers may have difficulties if one facility fails due to the criticality and interdependence at
the product level. A car takes hours to make, a smartphone takes minutes, yet a microcontroller
chip takes more than four months. It is impossible to speed up the silicon process. The speed at
which chips can be manufactured has physical restrictions. The semiconductor industry is still
figuring out how to operate in this new era, with factories and supply chains being pushed to
their limits. Customers are learning the hard way that chips aren't commodities in the meanwhile.
Furthermore, former US President Donald Trump's trade war with China had a significant impact
on progressive business planning by companies. It will keep putting pressure on supply
networks. That is why American customers are pressuring Samsung, TSMC, and others to build
additional operations in the Americas, and why the European Union is attempting to push the
semiconductor sector to move more to Europe. Automakers and medical device manufacturers
have requested the Biden administration to fund the creation of new semiconductor
manufacturing capacity in the United States, according to Reuters1. In response to the shortages,
the world's largest semiconductor maker, Taiwan Semiconductor Manufacturing Company
(TSMC), has boosted its capital spending budget for 2021 to $28 billion. However, funding and
construction of a new semiconductor fab takes at least five years.

2.2 The effect of Covid-19 pandemic on the semiconductor supply chain

The chip shortage has been a ticking time bomb since late 2019, when a few (unrelated)
supply-chain problems caused it to worsen. When the Covid-19 epidemic hit in spring 2020,
automakers curtailed orders for all parts and materials, including the chips needed for everything

1
2022.Available
at:<https://www.reuters.com/article/us-usa-semiconductors/automakers-medical-device-firms-ask-biden-fo
r-u-s-chip-factory-subsidies-idUSKBN2AI153>.

7
from touchscreen displays to collision-avoidance systems. When demand for passenger vehicles
recovered in the third quarter, chip manufacturers were already committed to serving their major
customers in consumer electronics and IT. The airfreight system has seen increased demand as a
result of global shipments of the Covid-19 vaccine, even as capacity has been cut as a result of
the pandemic-related drop in passenger travel, resulting in fewer passenger planes available to
carry freight. In fact, worldwide aviation freight capacity is 25% lower in the first quarter of
2021 than it was last year. Geopolitical variables also played a role, particularly when the Trump
administration tightened its controls on semiconductor sales to Huawei Technologies, ZTE, and
other Chinese companies. These businesses started stockpiling chips for 5G cell phones and
other products. At the same time, American companies were shut off from Semiconductor
Manufacturing International Corporation chips when the federal government placed the company
on a blacklist. A fire at a Japanese manufacturer in disrupted supplies of specialised fibreglass
for printed circuit boards. Then, a fire at an Asahi Kasei Microdevices company in Japan
rendered advanced sensing electronics used in the automotive and other industries obsolete. The
plant was still offline as of late February. As if all of these setbacks weren't enough, the global
transportation system has also been hampered. Nearly 7% of ocean freight is not making it out of
China ports this quarter, according to Clear Metal, which monitors over 90% of ocean freight.
Shortages of shipping containers forced corporations to pay higher shipping costs, driving
demand for air freight.

2.3 Economical impact of the semiconductor shortage from the perspective of the US
Automobile Industry

In this, we examine the impact of one bottleneck 'semiconductor shortages' on vehicle

manufacturing and new car costs, as well as whether these impacts are transient. During the
COVID-19 epidemic, we discovered evidence that a global semiconductor shortage hampered
US automobile production. New car prices have risen at the same time that vehicle stocks have
decreased, implying that the supply of new cars is insufficient to fulfil demand.
According to sources, semiconductor scarcity is harming manufacturers of a variety of goods
(Dollar and Clark, 2021). We investigate the scope of the shortage by looking at capacity
utilisation in the semiconductor industry in the United States. Actual output is compared to full

8
capacity production, which is defined as production capability with no downtime, completely
available inputs, and currently available gear and equipment. The total of all plants' market value
of actual production in that industry divided by the sum of all plants' full capacity output in that
industry is the capacity utilisation for that industry.
With about 10% of worldwide manufacturing capacity in 2019, the United States is a small but
important semiconductor producer (Platzner, Sargent, and Sutter, 2020; Semiconductor Industry
Association, 2020). We concentrate on US capacity usage because the data is readily available
and because recent changes in US utilisation rates are expected to reflect worldwide capacity
utilisation trends. The semiconductor industry in the United States was measured using data from
two sources. First, we use the Quarterly Survey of Plant Capacity Utilisation from the US Census
Bureau (QPC). From 1997 through 2006, the poll was performed annually, and since 2007, it has
been conducted quarterly: Q1. Second, we employ capacity utilisation estimates from the Federal
Reserve Board (FRB). The semiconductor industry data begins in January 1972 and is published
on a monthly basis. Both data sources provide disaggregated information for the manufacturing
industry as well as manufacturing as a whole.
According to data from the Census and the FRB, capacity utilisation in the US semiconductor
industry has lately reached exceptionally high levels, as illustrated in figure 1. In 2020:Q4, the
Census measure reached 93.2 percent, the greatest level since the records began. At 87.8% in
2021:Q1, the measure is similar to peak levels seen throughout the previous three expansions. In
May 2021, the FRB metric was 104.8 percent, which was higher than its historical average but
not higher than levels seen in 2018. Plants that are running at or near full capacity are subject to
increased overtime for personnel and reduced equipment maintenance time. Since 1972, this
level of capacity utilisation has only occurred a few times. In 2021Q:1, the Census measure
increased by around 15 percentage points over its average level in 2019. The FRB index has
increased by roughly 10% from its average level in 2019. These high capacity utilisation rates
are likely due to a worldwide semiconductor shortage, which is forcing local semiconductor
producers to ramp up production to satisfy demand.

Figure 2: Capacity Utilisation: Semiconductor and Related Device Manufacturing

9
Notes: Based on the FRB and Census, the figure illustrates the capacity utilisation rate in the semiconductor and
associated device manufacturing business. From 2007:Q1 to 2007:Q4, the dark areas surrounding the blue line
reflect 95 percent confidence intervals for the Census measure, which were not available. National Bureau of
Economic Research (NBER) recessions are indicated by shaded bars. The NBER's most recent peak is indicated by
the vertical dashed line. Last observation: April 2021, 2021:Q1 (Census) (FRB).
Census Bureau and Federal Reserve Board data (nonpublic).

Semiconductors are used in entertainment, driver assistance, and safety systems, among other
things, so modern cars cannot be built without them. Vehicle manufacturers' capacity utilisation
is lower than it was before the epidemic, supporting the story that the semiconductor shortage
has hampered output. According to FRB data, capacity utilisation in the transportation equipment
manufacturing industry (which deals with people and products transportation) is below
pre-pandemic levels, as illustrated in figure 2. In May 2021, the three-month moving average of
capacity utilisation in this business was 68.5 percent, up from the pandemic's lows (43.3 percent
in March 2020), but still 6.7 percentage points below the 2019 average. The FRB observes in its
June 2021 industrial production and capacity utilisation report that motor vehicle production
"continue[s] to be affected by semiconductor shortages."

10
Notes: The three-month moving average of FRB capacity utilisation in the transportation equipment manufacturing
business is shown in the graph. NBER recessions are indicated by shaded bars. The NBER's most recent peak is
indicated by the vertical dashed line. May 2021 was the last observation.
Source: Federal Reserve Board via Haver Analytics.

We concentrate on two factors. The first reason is that a company encountering semiconductor
shortages would most likely declare "insufficient supply of materials" as the principal reason for
producing below capacity, but other materials shortages could also be cited. Second, we evaluate
"insufficient orders" because this factor could potentially account for lower output. Insufficient
orders are a measure of product demand; a drop in the percentage of manufacturers stating
insufficient orders as a rationale for producing below capacity indicates that demand has
increased. Transportation equipment makers are more likely than before the global recession to
blame lower production on a lack of materials, which fits with the idea that semiconductor
shortages have hampered production in this industry. As illustrated in figure panel A, the
percentage of respondents in the transportation equipment manufacturing business stating limited
supply of materials has climbed dramatically since 2020:Q1 to high levels in 2021:Q1 (blue
line). This reason was given by 27,3% of respondents in 2021:Q1, which is much higher than
any other time since the statistics began in 1997.

11
Figure 3: Reasons for production below full capacity.

Notes: The percentage of respondents who mentioned insufficient supply of materials and orders as the key cause
for production below full capacity is shown in the graph. From 1996 to 2019, data is annual, and from 2020:Q1 to
2021:Q1 it is quarterly. There are no data for 2007 available. NBER recessions are indicated by shaded bars. The
NBER's most recent peak is indicated by the vertical dashed line. 2021:Q1 was the most recent observation.
Source: Federal Reserve Board via Census Bureau (nonpublic).

Lack of demand has been less of an issue for transportation equipment producers during the
pandemic recession. Figure 3 panel A shows how the percentage of respondents stating
insufficient orders has dropped dramatically since 2020:Q1 to low levels in 2021:Q1 (orange
line). Except for 2020:Q4, 46.0 percent of respondents in 2021:Q1 claimed this reason for
generating below full capacity, which is the lowest proportion since the data began in 1997. (45.3
percent). This decrease in the current recession is different from the two prior ones. The
percentage of responders stating this explanation increased during the 2008–2009 recession, and
to a lesser extent during the 2001 recession, indicating a drop in product demand.

12
Therefore, we find that capacity utilisation in the US semiconductor industry has risen to very
high levels recently, likely reflecting a global semiconductor shortage. Data shows that vehicle
manufacturers are more likely to report that insufficient materials, including a lack of
semiconductors, are constraining production than before the pandemic recession. Demand seems
to be less of an issue.

3. How should the microchip industry mitigate the semiconductor shortage?

Semiconductor executives, like all business leaders, are concerned about how they will adjust to
rapid shifts in demand as well as other COVID-19-related issues. They might be able to discover
a way forward by adopting a framework designed to help businesses transition to the future
normal. Resolve, resilience, return, reinvent, and reform are the five phases.

● Resolve: Address the urgent issues that Covid-19 poses to the semiconductor industry's
employees, customers, and partners.
● Resilience: During virus-related shutdowns and economic difficulties, address immediate
financial management challenges as well as larger resiliency issues.

The majority of semiconductor companies have either completed the first two phases or are
actively dealing with issues such as limited personnel availability and short-term financial
management. However, if organisations want to emerge stronger post-crisis, they must do
considerably more than handle operational issues during economic downturns, according to
experience. Despite focusing on immediate operational concerns, semiconductor executives
would benefit from planning ahead, which will entail moving through the return, reimagine, and
reform phases as rapidly as feasible.

● Return: When preparing for the return to the new normal, semiconductor executives
should assess whether any important business activities need to be revised in response to
changing demand dynamics. They may find it beneficial to concentrate on the following
things as they chart their course:

13
 (1) Adjusting demand planning - How long will it take for a change in customer demand
to affect semiconductor orders, and how steep will the decline be?
(2) Revising production planning - Is it possible for the company to change its production
plans and make expenses more flexible in order to accommodate changing client demand
and/or labour shortages?
(3) Revisiting sourcing strategy - How do country border closures and probable supplier
financial difficulties affect sourcing operations?
(4) Revising product pricing- Will shifting logistical costs and/or our customers'
willingness to pay have an impact on the company's product pricing strategy?
(5) Revising previous business practices - Do any business processes need to be altered,
or even eliminated, based on the company's experience with remote labour during the
pandemic?

● Reimagine: As semiconductor businesses begin to conceive a new normal for their

industry, they should form specialised working groups to monitor the following issues:
(1). Changing industry dynamics - New technologies that aided in the fight against
COVID-19 may have a long-term impact on how businesses operate. Some of the
changes in work processes and consumer behaviour that occurred during the pandemic
may remain, opening up new markets and routes to market. For example, semiconductor
companies may place a greater emphasis on digital marketing.
(2). Growth stimulation - Governments may soon provide subsidies, such as incentives
for more 5G deployments, to boost the economy in a variety of businesses. Other
government subsidies may stimulate local manufacturing or healthcare initiatives. Such
shifts could hasten technology adoption, forcing semiconductor companies to reconsider
their product roadmaps.
(3). Sourcing shifts - Companies all over the value chain will most likely change their
sourcing strategy. For semiconductor companies, this might mean leveraging foundries
even more and reducing their dependency on essential suppliers.

14
● Reform: Throughout the reform phase, semiconductor companies should monitor changes
in the following areas:
(1). Regulatory environment - Because economies are still strongly intertwined, trade
tensions are unlikely to rise dramatically in the near term, and governments will be wary
of putting more strain on businesses that are still recovering. However, if governments
opt to subsidise local sourcing and manufacture, chances for fast movers may arise.
(2). Competitive environment - We are expected to see greater M & A activity as the
crisis drains liquidity from companies and valuations take a major knock (with large
variance depending on semiconductor end market exposure). Potential regulatory
restrictions on overseas purchases should be monitored by the companies involved.

Companies can build their strengths by reviewing and capturing strategic opportunities at
a rapid pace as they progress through the five phases that will lead them to the next
normal. Manufacturers are modifying their spending to reduce supply chain risk. Global
semiconductor equipment investment is forecast to rise 10%, bringing overall spending to
a record high of $98 billion.

15
4. CONCLUSION

Although most people agree that Covid played a significant role in the chip shortage, there was a
lot going on behind the scenes. Manufacturers expected a decline in consumer purchasing as a
result of the lockdowns and job losses. You've undoubtedly already felt the effects of the chip
scarcity as a consumer or a producer. On average, lead times are four to eight weeks longer, and
often even longer. To brace for the economic consequences, semiconductor chip purchases were
halted and supplies were diverted to other customers. Demand surged quicker than expected as a
result of stimulus finding and at-home demands, forcing some enterprises to lose money. Chip
availability was severely impacted by this, as well as simultaneous shutdowns of semiconductor
chip manufacturing plants. Although we are not yet out of the woods, some experts believe the
chip scarcity will be resolved within the next year or two.

16
5. BIBLIOGRAPHY

● Kristoph Naggert, Pawel Krolikowski, et al. “Semiconductor Shortages and Vehicle

Production and Prices.” Website, www.clevelandfed.org, 8 July 2021,
https://www.clevelandfed.org/newsroom-and-events/publications/economic-commentary/
2021-economic-commentaries/ec-202117-semiconductor-shortages-vehicle-production-pr
ices.aspx?utm_source=anysubj.com#U5.
● Boston, William. 2021. “Global Chip Shortage Set to Worsen for Car Makers.” Wall
Street Journal, April 29, 2021, sec. Business.
https://www.wsj.com/articles/global-chip-shortage-set-to-worsen-for-car-makers-116197
08393.
● Semiconductor Industry Association. 2020. “2020 State of the US Semiconductor
Industry.”
https://www.semiconductors.org/2020-state-of-the-u-s-semiconductor-industry/.
● Yinug, Falan. 2021. “Chipmakers Are Ramping Up Production to Address
Semiconductor Shortage. Here’s Why That Takes Time.” Semiconductor Industry
Association (blog). February 26, 2021.
https://www.semiconductors.org/chipmakers-are-ramping-up-production-to-address-
semiconductor-shortage-heres-why-that-takes-time/.
● Pachhandara, Nikhil. “Council Post: Impacts Of The Global Chip Shortage And
How To Prepare As The Backlog Stabilises.” Forbes, www.forbes.com, 19 May
2022,
https://www.forbes.com/sites/forbestechcouncil/2022/05/19/impacts-of-the-global-ch
ip-shortage-and-how-to-prepare-as-the-backlog-stabilizes/?sh=5c5edb6b24d
● “Coronavirus: Implications for Semiconductor Demand | McKinsey.” McKinsey &
Company, www.mckinsey.com,
https://www.mckinsey.com/industries/semiconductors/our-insights/coronavirus-impli
cations-for-the-semiconductor-industry. Accessed 21 May 2022.

17
18