Q&A: Breaking Down the Chip Shortage

March 9, 2022

Insights
Read
Article

Though some of the supply chain delays are related to staffing concerns related to COVID, the most prevalent disrupter is the chip shortage. As supply chain continues to be a topic of discussion for consumers in all industries, and a pain point for most manufacturers and distributors, the below interview sheds some light on the cause of the chip shortage and the outlook for the next few years.

Eskander Yavar, BDO’s National Manufacturing Practice Leader, sat down with Tom Stringer, BDO’s Site Selection & Incentives Practice Leader, to dig deep into the chip shortage and answer some pressing questions: What’s causing it, how long will it last and why are there outsized impacts for the automotive sector?

Eskander Yavar: What caused the chip shortage?

Tom Stringer: Believe it or not, industry reports dating back before COVID-19 warned of the risk of a pending shortage, as demand for 200mm manufacturing equipment — which is critical to manufacture chips — outpaced production. Shortly after the pandemic hit, its disruption was immediately clear, as the demand for digital products and services dramatically increased and production lines were shuttered globally. Even though manufacturers and tech companies began to stock up on semiconductors in hopes of withstanding the storm, the spike in need for chips has yet to decline.

Eskander: Speaking of the evolving digital environment, where can the average consumer expect to find chips in their day-to-day products?

Tom: You’d be amazed — there are chips in products you wouldn’t suspect, including toothbrushes, washing machines, children’s toys and more. More apparent items include laptops, cellphones, cars and smart home appliances. The list goes on. And the number of chips per product vary by the complexity of its capabilities. For example, cars today come with a slew of new digital features requiring hundreds of chips and integrated circuits per vehicle. Additionally, with the expansion of artificial intelligence (AI) and the Internet of Things (IoT), the need for chips in day-to-day items is growing exponentially.

Eskander: Can you explain why the chip shortage has affected the automotive sector so significantly and how companies have responded?

Tom: At the outbreak of COVID-19, demand for cars dropped pretty drastically — after all, we were under stay-at-home orders, and daily commutes to work and school were replaced with virtual solutions. And above all, people were concerned for their health and didn’t want to risk travel, even domestically. For the average consumer, cars were no longer as much of a necessity. This is in addition to production shutdowns that idled the industry and reduced the available supply of new product. But as restrictions eased, cases leveled and vaccines became available, consumers were ready to spend the discretionary cash they’d saved over the past year. At the same time, many were looking forward to planning road trip vacations in lieu of air travel.

But chip production still hadn’t bounced back since the pre-COVID-19 demand surges. Dealership lots emptied quickly. As a result, many automotive manufacturers significantly cut production targets, and some temporarily shut down facilities or slow-rolled production, while others are rationing their chip supply for their more expensive models to capitalize on profit margins. In some cases, consumers have had to absorb the costs, whether by waiting additional months for production or paying more for models available.

Eskander: It’s important to note that although this disruption is severe, the automotive sector only makes up a portion of chip manufacturers’ customer base. Consumer electronics, some of which you previously listed, and tech companies are facing similar challenges. When can we expect the chip shortage to subside?

Tom: Unfortunately, we’ll likely continue to see its disruption for the next four to five years until production capacity returns. And in the second half of the decade, manufacturers will need to prioritize quality control and verify the legitimacy of their chip supply. Any time there’s heightened demand, there’s fraud right behind it. We’ll likely see counterfeit chips enter the market and our supply chains, which will cause cascading issues until verifiable and certified manufacturing capacity catches up to demand.

But the good news is there are solutions on the horizon. There’s legislation called the CHIPS for America Act, which is a Trump-era policy that the Biden administration has doubled down on. Its goal is to bring as much chip manufacturing technology to the U.S. as possible, because so much of its production and sourcing comes from international suppliers.

U.S. chip manufacturers have an opportunity to capture federal financial incentives by building new production capacity in the U.S. or repatriating existing capacity. Some have already made substantial investments in chip facilities and new 200mm equipment, but they’ll need to assess location criteria and capitalize on incentive savings to maximize value.

Eskander: It sounds like solutions will require considerable funding. In the meantime, chip manufacturers can consider refurbishing existing equipment to improve capacity. Nevertheless, it’s good to know there’s optimism.

The bottom line

The chip shortage isn’t going away, and its effects will ripple through global supply chains for years to come. Manufacturers must respond to the current impacts while also building chip shortage considerations into their business plan for the years ahead.

Consider these key steps to help preserve business continuity and respond to the ongoing impacts of the chip shortage:

Stay up to date on changing legislation and incentives related to the chip shortage to ensure you’re taking advantage of all possible opportunities to protect and strengthen your business.
Build additional security measures into your supply chain now to reduce vulnerability to fraud in the future.
Proactively communicate with your investors so they understand the impact of the chip shortage on your business and what that will mean for your business outlook over the coming months.
If you haven’t already, invest now in expanding your manufacturing capacity.
Incorporate considerations related to the chip shortage in your business continuity planning.