Global Product Supply Chain Shortage: The Dip in Microchips

Due to many underlying reasons, the ripple effect of material and product shortages is currently felt worldwide, all tracing back to the COVID-19 pandemic. While manufacturers, suppliers, and supply chains may have abruptly noticed the effect of these shortages, even small businesses and shop owners can no longer take for granted the ability to order whatever they want for granted.

The product shortage is a symptom of the remarkable global supply chain system – businesses have been utilizing the benefits of different countries to streamline their organization’s operations. International supply chains and logistics operated so well together to supply the world with goods sufficiently. Now, with the pandemic causing massive disruptions to international travel and logistics, that system has been halted, chopped up, and in some cases, completely stopped.

Many manufacturers had to shut down partially, others completely, causing links within many supply chains to lose their functionality – and as we know, chains are only as strong as their weakest link. The knock-on effect of travel restrictions, increased trade regulations and production halts is that there is less product availability at the end of the chain, which the world is currently experiencing.

An Illustrative Example: Microchips on the Auto Industry

To illustrate what supply chain shortages look like under a microscope, we can consider the effect of the microchip shortage on the auto industry. Like many other industries in 2020, the semiconductor industry, responsible for manufacturing chips, was forced to shut down, and the halt in production has had lasting effects.

Microchips are a crucial component in manufacturing cars reliant on technology (which is now nearly all of them). Due to their current shortage, auto manufacturers don’t have the materials to produce cars in the same capacity. This one small item has caused a significant ripple effect throughout the entire automotive industry, which is expected to suffer a $110 billion financial loss for the year, according to the global consulting firm AlixPartners.

What Further Issues Can We Expect From the Microchip Shortage?

Drop In Production

As a noticeable impact of the lack of microchips, vehicle assembly lines have had to decelerate their production to match the volume of microchips available. In 2021, the global output of automobiles is expected to drop by a total of four million or nearly five per cent. In an area as established as the automotive industry, supply and demand are a solid match, so this drop in supply will rapidly drop sales as waiting lists grow and auto companies lose revenue.

The CEO of chipmaker firm STMicro has estimated the shortage to last into 2023. Given that it’s a medium-term issue, manufacturers also lose their ability to plan their manufacturing revamp to normal levels. An inability to plan their production can ensure an unnecessary lack of production when material becomes available, adding to their revenue loss.

Expanding Microchip Use Causing Further Shortages

From another angle, the pandemic has created a shift in the popularity of cloud computing, cryptocurrency mining, and demand for technological devices – as we’ve all become more reliant on digital devices and services.

Additionally, there has been an increased requirement for more tech to meet the growth in employees working from home, and extreme isolation has caused a spike in gaming console purchases. With Sony estimating to have sold 4.5 million consoles last year alone, these factors have contributed a big splash to the microchip shortage and impacted the automotive industry.

Auto Industry As the First Domino

Cars are so uniformly technologically advanced now that just about every manufacturer is expected to be affected by this shortage, which helps us make sense of the estimated $110 million figure. The global chip shortage has hit the automotive industry hard and fast, and supply chain experts warn that they might only be the first domino in a series of microchip-dependent industries.

Taiwanese semiconductor companies are focusing on solving the shortage issue for the automotive industry by tailor-making chips for cars, which could solve the shortage in a matter of weeks. However, a ramp-up of auto microchips may see a lack of other chips for other industries until they are affected similarly.

Experts have highlighted that the smartphone manufacturing industry could be the next hit by the shortage, causing manufacturing and shipments of new models to drop. It’s hard to separate smartphones from other small electronic devices and appliances, and the effects could quickly expand into a lower supply of a variety of machine and industrial equipment.

A lack of industrial equipment could even imply an impact on manufacturing equipment. If the shortage impacts the equipment used in production assembly lines, we could see a much broader and expansive effect of a microchip shortage – an inability to create factory products.

What Could Be a Possible Solution?

Redistribution of Production Demand

The dynamics and innovation we’ve seen in global supply chain management to create these effective systems in the first place and adapt to changes are inspiring and leave us confident that solutions are always just around the corner. The chief economist at ING Greater China recommends restructuring production demand to allow China to make up for the drop in production from Taiwan as one possible solution.

Prioritizing Production Lines

Until microchip supply can meet the needs of the industry, auto manufacturers can make some internal changes to optimize their production and minimize their loss of revenue. On a localized scale, manufacturers could review their production portfolio to assess priority lines and car models. They could then prioritize the production of their models to support their priority demand where possible, so the five percent drop in production has the smallest impact on revenue.

Adjust Products to Match Material Supply

Manufacturers have also claimed to be revising the specifications and features of their car models dependent on semiconductors. For example, they could offer alternative models that don’t include satnavs and reversing systems to use their production capabilities while using fewer microchips.