Semiconductor Shortage - Reasons, Impact & Way Forward [UPSC]

Semiconductor chips or processors power every possible product on the market, from high-end cars to washing machines. But there has been an abrupt and cascading shortage of semiconductors worldwide and with the rapid spread of the Omicron variant of COVID-19 across the world, experts have warned of the continuous shortage of semiconductor chips.

This article will help you immensely in preparing such topics for the IAS exam, especially the mains exam, where a well-rounded understanding of topics is a prerequisite for writing answers that fetch good marks. You will study in detail the reasons and impact of the semiconductor shortages. This topic becomes part of the GS Paper-3 under Science and Technology.

What are Semiconductors?

• Semiconductors or chips have properties that are somewhere between conductors and insulators. They are materials with conductivity ranging between metals and ceramics. 
• Semiconductors can be pure elements, such as silicon or germanium, or compounds, such as gallium arsenide or cadmium selenide.
• It’s an electric circuit with many components such as transistors and wiring formed on a semiconductor wafer. An electronic device comprising numerous of these components is called an Integrated Circuit (IC). 

Read about SaChipping in for Industry 4.0 in the linked article.

Where are Semiconductor chips used?

• Semiconductor chips are the basic building blocks that serve as the heart and brain of all modern electronics and information and communications technology products.
• They are used to power a wide range of devices – cars, laptops, smartphones, household appliances and gaming consoles. Although they are tiny, they perform a host of functions such as powering displays and transferring data.
• Since these chips are now an integral part of contemporary automobiles, household gadgets and essential medical equipment, their supply crunch has a consequent impact on sales of these products, such as cars, fridges, laptops, TVs and other electronic devices. 

The topic can be asked as a Current Affairs Question in IAS Prelims. Visit the attached link to attempt the Current affairs quiz.

Manufacturing and Global Producers of Semiconductor Chips

• Fabricating semiconductor chips is a task of precision. It requires more than three months and involves giant factories, dust-free rooms, multi-million-dollar machines, molten tin and lasers, for manufacturing.
• Semiconductor manufacturing is led by Taiwan Semiconductor Manufacturing Company (TSMC) in Taiwan and Samsung Electronics in South Korea. Recently, American chipmaker Intel has also planned to build two new chip factories in Chandler, Arizona.

Read more about National Manufacturing Policy in the linked article.

Reasons for the Shortage of Semiconductor Chips

• Covid-19 Pandemic – The effect of the pandemic was two-fold:
  • Manufacturing came to a standstill during the pandemic, which impacted the supply chains of products that needed one or more of these chips.
  • Lockdowns increased the growth in sales of laptops, tablets and mobile phones to the highest in a decade, as everything from school to office became online.
• As the automotive sector was almost shut down during 2020 because of the pandemic. False Forecasts by the automakers by underestimating the rebound in the car sales led to rushed-up re-up orders late in 2020, increasing in demand of the medium-level chips used in the car manufacturing, unlike the small and tiny chips used in smartphones or laptops.
• China-US Trade war– Chinese smartphone makers began building up inventory and stockpiling the semiconductor chips to ensure it could survive US sanctions that were set to cut it off from its primary suppliers. 
• Disasters: Production plants in the US were affected by the cold and in japan by wildfire.
• Expensive and long process of manufacturing– Fabricating advanced logic chips requires extraordinary precision, along with huge long-term bets in a field subject to rapid change.

Impact of Semiconductor Shortage

• Countless industries have been affected as global demand for semiconductor chips continues to outstrip supply.
• Chip shortages are expected to wipe out USD 210 billion of sales for carmakers this year, with the production of 7.7 million vehicles lost.
• The semiconductor shortage will severely disrupt the supply chain and will constrain the production of many electronic equipment types.
• The chip shortage directly impacts consumers as prices of everyday appliances and electronic goods — from TV to smartphones — have increased due to the global supply chain disruption

Initiatives to resolve semiconductor shortage

Global Initiatives

Various countries are trying to safeguard their interests by introducing packages to attract more chip manufacturing.

• TSMC which controls 24% of the semiconductor supply chain, is setting up a $12 billion facility in Arizona.
• Japan and Germany have got TSMC to start speciality technology fabs in their countries.

Indian Initiatives

• India has approved a $10 billion package to incentivise the manufacturing of semiconductors in the country.
• Production-Linked Incentive (PLI) scheme has been introduced for semiconductor and display board production.
• Chips to Startup (C2S) Programme has been launched with the aim to train 85,000 high-quality and qualified engineers in the area of Very-large-scale integration (VLSI) and Embedded System Design.
• Design Linked Incentive (DLI) Scheme has been launched to nurture at least 20 domestic companies involved in semiconductor design and facilitate them to achieve a turnover of more than ₹1500 crores in the next 5 years(2022-27).

Way Forward

• Fab manufacturing (semiconductor fabrication plant is commonly called “fab”)- To create the ecosystem for fab manufacturing, it is important to lock in the demand for semiconductors produced within the country.
• To come up with the ideas so that the production of these semiconductors is consumed within the country.
• Develop raw material supply capabilities– This will help the Indian gas, materials, and mines industry and also expand opportunities for semiconductor equipment, spares, and service industry.
• Fab clustering-To ensure that semiconductor supply chains and related businesses are in one place to create linkages.

Such sites should be chosen based on the ability of the location to act as a force multiplier for the development of an ecosystem.

• Focus on encouraging Indian manufacturers and start-ups to enter and master complex R&Ds. Premier research institutions such as the Indian Institute of Science should be incentivised to work on R&D in chip designing and manufacturing.

Note: As UPSC 2022 approaches, use BYJU’S free Daily Video Analysis of The Hindu Newspaper to augment your preparation.

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