From the consumer electronics industry to the auto industry, the entire electronics industry is experiencing a global electronic component shortage, leading to supply chain disruptions and causing challenges for manufacturers.
Major chip manufacturers including TSMC, Samsung, Nvidia, and Intel even predict the chip shortage will continue into 2023 and the next years after. This article explores various factors contributing to the electronic component shortage and the potential effects of the supply shortages on the electronics industry.
1. Impact of the COVID-19 Pandemic
Many facilities manufacturing electronic components had to shut down or operate at reduced capacity due to the lockdowns during the spread of the COVID-19 pandemic and raw material shortages. This intensified in some areas towards the second half of 2020, as the COVID-19 pandemic drove the global electronic component supply into its worst decline ever.
Many manufacturers found it hard to obtain the raw materials needed to continue producing electronic parts to cover pending orders, as they had been in short supply. Also, due to the origin of the coronavirus in China, many components in the supply chain for U.S. manufacturers come from Asia. As a result, shortages began to impact U.S. manufacturers before the virus even reached the United States.
Also, during this time, there was a worldwide shortage of ventilators and an increased demand for X-ray machines, diagnostic tools, and other medical devices that utilize electronic components.
Component manufacturers and suppliers who were still able to produce shifted their operations to prioritize parts for the healthcare industry, as they generously dedicated their capacity to these lifesaving efforts.
Additionally, many people were required to work from home and students had to switch to online classes. This led to an increase in demand for upgraded computers and a rise in video gaming. Businesses also had to quickly set up remote work systems, resulting in a need for more cloud infrastructure, which needs electronic components to work.
The spread of the pandemic has since slowed down and the supply chains have recovered, plus production lines have picked up again, although it is not enough to cover the backlog of pending orders and meet new consumer demand.
Long after many countries have recovered from the COVID-19 pandemic, quarantines were recently re-implemented across China. This forced many factories to go on lockdown, meaning they could not produce at full capacity or all.
Although slowly being removed, these quarantines in China have led to logistics problems and stretch in lead times for companies that rely on electronic components such as resistors, transistors, integrated circuits, memory products, and other electronic components, to make consumer electronics.
These days, delivery times for these components range from 20 to 50 weeks, or even more than 100 weeks. Although manufacturers are attempting to ramp up production to bridge the gap between supply and demand, there is only so much fab space available to do so.
If companies cannot get the components on time due to the slow lead times, it can be frustrating for them and may lead to lost business opportunities. To overcome the slow lead times, many of these companies have had to turn to other sources to get them, which involves paying higher prices or incurring additional costs.
2. Shortage and Rising Prices of Rare Earth Elements
Image by Ranjat M from Pixabay
Rare earth elements such as neodymium (NdFeB) and Samarium (SmCo), crucial for producing magnets in electronic parts due to their high performance, are becoming scarce and costly to purchase. Due to limited global production capacity and the inability to artificially reproduce them, their availability and price have become increasingly uncertain.
According to a report by Independent research and advisory services, Adamas Intelligence, in 2021, the global consumption of NdFeB magnets jumped by 18.1% due to the surge in demand from 2020; The report also forecasts that, given the surging demand for these magnets, there may be a significant NdFeB shortage by 2035.
The surging demand for these high-performance magnets has mainly been due to the rise of 5G, IoT technology, and the demand for IoT devices. There is also the development of renewable energy and the demand for custom automotive components for electric vehicles in the automotive sector, which does not seem will end anytime soon.
3. High Demand Due to the Rise of IoT and 5G Technology
Impact of High Demand Due to the Rise of IoT Technology
The surge in demand for consumer electronics has strained supply chains for electronic parts in recent years. For example, last year saw increased smartphone sales and sales of smart appliances. As a result, we have seen a tight supply of components, including microprocessors, sensors, and communication modules.
This rising demand can be attributed to the growing popularity of the Internet of Things (IoT), which is a network of connected devices that have become essential in our daily lives. To meet the strong demand for components amidst the shortage, manufacturers have been working to increase capacity at their fabs (microchip manufacturing plants).
However, this has not been enough to keep up with the demand in the IoT market, leading to price hikes for some components. Other manufacturers have also been seeing the shortage hinder their ability to meet the strong sales they have seen in the past few years.
The global electronic component shortage has not only affected consumer electronics makers, but also their digital transformation efforts. They rely on these components to innovate newer and better products but the tight supply has made it difficult for them to do so and stay competitive in the market.
Impact of High Demand Due to the Rise of 5G Technology
The rollout of the 5G network has also contributed to the pressure on the supply chain, which is an accompanying cause of the component shortage. 5G is the new generation of mobile communication technology that promises faster speeds and lower latency than previous generations.
However, 5G devices require various electronic parts to support these capabilities, including antennas, RF filters, and power amplifiers. The simultaneous deployment of 5G networks and the expansion of the IoT have led to an even greater demand for electronic parts, thus exacerbating the component shortage.
4. Increased Demand for Renewable Energy and Green Technologies
Impact on Renewable Energy
The increasing demand for renewable energy sources and green technologies has caused shortages of specific electronic parts used in solar panels, wind turbines, and energy storage systems.
The demand for renewable energy technologies has led to higher component prices, as manufacturers can charge more due to the high demand and limited supply. This has affected companies and individuals looking to switch to renewable energy, as they may be hesitant due to the higher costs.
If the consistently high demand for electronic parts is unmet, it could result in delays and setbacks in developing and deploying renewable energy sources. This, in turn, will slow down the industry and further delay the transition to sustainable living to reduce global warming.
Impacts on Green Technologies
The current state of the automotive industry and other sectors in the green technology industry has been greatly impacted by the global chip shortage, with many electric car producers struggling to meet demand due to production shutdowns caused by the lack of necessary components. This includes automotive ICs, such as display driver ICs, essential for electric vehicles.
Other automakers in the auto industry have also been impacted by the shortage of multilayer ceramic capacitors, which are commonly used in automotive applications. To combat the shortage, some automotive manufacturers have turned to the gray market to acquire the necessary components, often at a higher cost.
In addition, due to the high demand for electric vehicles, competition among companies is intense. To sell more cars, some companies are reducing their prices even if they do not have sufficient chips to meet the demand.
5. Impact of Environmental Regulations
The mining and processing of Rare Earth Elements involve using various chemical substances, which can have negative environmental impacts, such as waste generation. They also often contain toxic metals, fluorine, and radionuclides that can be released during processing and pose safety risks to workers.
Past mining and processing of Rare Earth Elements have caused significant environmental issues in countries such as; Brazil, China, and the USA. In addition to the environmental damage caused, the remediation of contaminated sites has also been expensive. This has increased calls for regulations to overcome the issue.
However, as more countries adopt stricter environmental regulations, rare earth element mining companies are under pressure to research new and effective risk management strategies to reduce the environmental impact of their mining processes. This pressure may lead them to mine fewer quantities of these elements, causing shortages in the component market.
6. Over-reliance on Few Manufacturers and Suppliers
Too many companies currently rely on the few manufacturers or suppliers responsible for a large portion of the electronic components supply in the global market. This over-reliance has slowed down the market competition and is giving the manufacturers and suppliers control over which company gets which electronic part first.
Manufacturers and component suppliers also have priorities, and when demand exceeds supply, they will always look after their best customers. This may include companies that place large orders or have a long history of doing business with them. As a result, other companies may have to wait longer for theirs or not even get them.
In addition, if a manufacturer or supplier is responsible for a large portion of the market, any disruption in their production or supply chains can lead to a shortage of electronic parts. For example, if a manufacturer experiences a natural disaster or labor strike, it can significantly impact their productivity and lead to a further shortage.
7. Production Shift to High-margin Products by Manufacturers
Many manufacturers of electronic components operate as monopolies, which allows them to have some control over the market. Rather than expanding their product lines and trying to capture a larger market share, these manufacturers have focused on producing high-margin products, especially in the automotive and industrial segments, to ensure their sustainability.
As a result, companies that are looking for low and medium-priced components, especially for use in basic consumer electronics are no longer the main focus of these manufacturers. Instead, they target customers willing to pay a higher price for their products. The shift in focus has caused changes in availability and price increases for other customers.
In addition, many companies still rely on older components due to their lack of investment in the latest technology. However, component manufacturers prioritize the production of newer components such as 28nm chips because they have the highest profit margins.
Major chip manufacturer, TSMC recently informed automakers and other manufacturers that rely on older legacy chips like the 40nm and 90nm that it is time to switch to newer technologies. The manufacturer added that it will no longer increase its capacity for these older nodes and encouraged its clients to transition to the 28nm node instead.
Many manufacturers now focus on producing auto-rated and specialty industry-related parts electronic devices with higher margins; rather than low and medium-priced electronic parts. Due to the change in production, the number of units produced has decreased, thus exacerbating the shortage issues.
This shows the importance of maintaining strong relationships and communication with suppliers. Getting along with them well during both the good times and the difficult times will increase the chance of them prioritizing doing business with you over others.
If you develop a strong relationship with them, they can provide benefits such as updated information on market conditions, and early notice of part availability. Plus, they can also provide potentially helpful insights and more resources on how to navigate future shortages.
8. Impact of Recent Manufacturer Mergers and Acquisitions
You may wonder how mergers and acquisitions might be related to the current component shortages. While these deals are generally beneficial for all parties involved, they may cause instability in the market, which could temporarily delay the fulfillment of new orders, contribute to component shortages, and affect their global sales.
For example, the consolidation could lead to reduced competition in the market, which may result in potentially higher prices for components. They can also lead to changes in the production and distribution of the electronic parts they produce, which may cause supply chain issues and affect the availability of specific ones.
One possible reason for the current global shortage of electronics components is the recent purchase of Apple chipmaker Dialogue Semiconductor by Renesas Electronics, valued at approximately $4.9 billion. The acquisition will enhance the presence of Renesas in the Internet of Things, industrial, and automotive markets.
Other recent deals that may have temporarily contributed to the shortage include the acquisition of US digital engineering services company, GlobalLogic, by Japanese electronics and construction giant Hitachi, in a $9.6b deal. Swedish PCB supplier NCAB also acquired PreventPCB, a leading PCB supplier in Italy, in a $17.1m deal.
9. Effects of the US and China Chip War
China is one of the major chip manufacturers in the semiconductor industry. However, the US has been working to slow down its progress in semiconductor production, which is causing semiconductor shortages and contributing to the global chip shortage, as it is becoming more difficult for China to produce enough semiconductors to go around.
Advanced chips are essential for military hardware, AI, and supercomputers, making its use of the technology a perceived threat to US national security, especially given the ongoing conflict in Ukraine waged by Russia.
In October, the US government announced that companies exporting chips to China are henceforth be required to obtain licenses if they use American tools or software, regardless of the production location. They also forbid US citizens and green card holders (US permanent residents) from working for certain Chinese chip companies.
The restrictions on technology exports to China will hinder its development of advanced semiconductors in the short and long term. Meanwhile, China has labeled these controls “technology terrorism” and filed a complaint with the WTO, claiming that the US is using export controls to maintain its dominance in technology industries.
China’s ultimate goal is to produce more semiconductors to increase its market share. However, its inability to access US technology and talent due to the conflict is causing an advanced chip shortage in China. It is also causing global chip shortages and causing disruptions in the global supply chains for electronic parts.
Aside from the chip war between the US and China, one other factor that has also put a strain on component manufacturers is the current war in Ukraine. The war has impeded the export of neon gas used by lasers used to cut minuscule chips, thus influencing the global chip shortage.
Other factors include the fires and droughts faced by the semiconductor industry in Southeast Asia. In 2021, a fire at a Renesas chip factory in Japan disrupted production for several months.
In addition, two semiconductor resin manufacturers in South Korea and China experienced explosions and serious fires, further impacting production. Drought in Taiwan also disrupted the local chip industry by affecting the water supply, which is crucial for chip production.
In a recent interview on CNBC’s TechCheck, Intel CEO, Pat Gelsinger said we may see the current supply constraints will further extend the semiconductor shortage into 2024. However, it is hoped that the shortage can be alleviated to the highest level before then.
10. Impact of Global Economic Inflation
Inflation is driving up the cost of raw materials and other resources used in producing electronic parts. As prices for raw materials and other inputs continue to push overhead expenses to new heights, component manufacturers are finding it increasingly difficult to maintain profit margins while maintaining competitive prices for their products.
The manufacturers face a difficult decision; absorb the costs of rising raw materials or pass them on to consumers, which may lead to a loss in their share of the market to competitors with lower prices. Either way, inflation is causing a challenging operating environment for manufacturers, thus contributing to the global electronics component shortage.
Global economic inflation has also caused an increase in transportation costs, which makes it more expensive to ship electronic parts around the world. It has further exacerbated the global electronics component shortage, as manufacturers cannot efficiently move their products to where they are needed.
Conclusion
The electronic components shortage is a complex and multifaceted problem that requires a concerted effort from all stakeholders to resolve. By addressing the root causes and implementing necessary solutions for meeting demand, the electronics industry can create new opportunities to overcome the shortage, continue thriving in the face of increasing demand, and find the best way forward to prevent future shortages.
1. Impact of the Covid-19 Pandemic
Many electronic components manufacturing facilities had to shut down or operate at reduced capacity due to the COVID-19 lockdowns, as manufacturers found it hard to obtain the raw materials needed to continue producing electronic components to cover pending orders.
The spread of the pandemic has since slowed down, plus production has picked up again, although it is not enough to cover the backlog of pending orders and meet the fulfillment of the new ones. This has led to delivery delays and lead time stretches for companies that rely on electronic components for their products or services.
If they cannot get the components on time, it can be frustrating for them and may lead to lost business opportunities. To overcome the issue, many of these companies have had to turn to other sources to get them, which involves paying higher prices or incurring additional costs.
2. Shortage and Increase in Prices of Rare Earth Elements
Rare earth elements such as neodymium (NdFeB) and Samarium (SmCo), crucial for producing high-performance magnets in electronic components, are becoming scarce and costly to purchase. Due to limited global production and the inability to artificially reproduce them, their availability and price have become increasingly uncertain.
According to a report by Independent research and advisory services, Adamas Intelligence, in 2021, the global consumption of NdFeB magnets jumped by 18.1% due to the surge in demand from 2020; The report also forecasts that, given the surging demand for these magnets, there may be a significant NdFeB shortage by 2035.
The surging demand for these high-performance magnets has mainly been due to the rise of IoT, 5G, and renewable energy technologies and does not seem to be slowing down anytime soon.
3. High Demand Due to the Rise of IoT and 5G Technology
One of the primary drivers of the component shortage has been the rapid growth of the IoT; this refers to the interconnected network of physical devices, vehicles, buildings, and other objects, embedded with sensors, software, and network connectivity, allowing them to collect and exchange data.
As the number of IoT devices has increased, so has the demand for the electronic components that power them, such as sensors, microprocessors, and communication modules; This demand has put pressure on the supply chain for these components, leading to shortages.
The rollout of 5G networks has also contributed to the component shortage. 5G is the new generation of mobile communication technology that promises faster speeds and lower latency than previous generations.
5G devices require various electronic components to support these capabilities, including antennas, RF filters, and power amplifiers. The simultaneous deployment of 5G networks and the expansion of the IoT have led to an even greater demand for electronic components, exacerbating the component shortage.
4. Increased Demand for Renewable Energy and Green Technologies
The increasing demand for renewable energy sources and green technologies has caused shortages of specific electronic components used in electric cars, solar panels, wind turbines, and energy storage systems. This demand has pressured manufacturers to ramp up production, leading to shortages of specific components.
The demand for renewable energy technologies has also led to higher prices for these components, as manufacturers can charge more due to the high demand and limited supply. This has affected companies and individuals looking to switch to renewable energy, as they may be hesitant due to the higher costs.
If the consistently high demand for electronic components is unmet, it could result in delays and setbacks in developing and deploying renewable energy sources and green technologies. This, in turn, will slow down the industry and further delay the transition to sustainable living to reduce global warming.
5. Impact of Environmental Regulations
The mining and processing of Rare Earth Elements involve using various chemical substances, which can have negative environmental impacts, such as waste generation. They also often contain toxic metals, fluorine, and radionuclides that can be released during processing and pose safety risks to workers.
Past mining and processing of Rare Earth Elements have caused significant environmental issues in countries such as; Brazil, China, and the USA. In addition to the environmental damage caused, the remediation of contaminated sites has also been expensive. This has increased calls for regulations to overcome the issue.
However, as more countries adopt stricter environmental regulations, rare earth element mining companies are under pressure to research effective ways to reduce the environmental impact of their mining processes. This pressure may lead them to mine fewer quantities of these elements, causing a shortage of electronic components.
6. Over-reliance on Few Manufacturers and Suppliers
Too many companies currently rely on the few manufacturers or suppliers responsible for a large portion of the electronic components in the global market. This over-reliance has slowed down the competition in the market and is giving the manufacturers and suppliers control over which company gets which electronic components first.
Manufacturers and suppliers also have priorities, and when demand exceeds supply, they will always look after their best customers. This may include companies that place large orders or have a long history of doing business with them. As a result, other companies may have to wait longer for theirs or not even get them.
In addition, if a manufacturer or supplier is responsible for a large portion of the market, any disruption in their production or supply chain can lead to a shortage of electronic components. For example, if a manufacturer experiences a natural disaster or labor strike, it can significantly impact their productivity and lead to a further shortage.
7. Production Shift to High-margin Products by Manufacturers
Many manufacturers of electronic components operate as monopolies, which allows them to have some control over the market. Rather than expanding their product lines and trying to capture a larger market share, these manufacturers have focused on producing high-margin products and ensuring their sustainability.
As a result, companies that are looking for low and medium-priced components are no longer the main focus of these manufacturers. Instead, they target customers willing to pay a higher price for their products. This shift in focus has led to changes in the availability and pricing of electronic components for many companies.
Many manufacturers now focus on producing auto-rated and specialty industry-related electronic components with higher margins; rather than low and medium-priced electronic components. Due to the change in production, the number of units produced has decreased, leading to a shortage.
8. Impact of Recent Manufacturer Mergers and Acquisitions
You may wonder how mergers and acquisitions might be related to the current shortage of electronic components. While these deals are generally beneficial for all parties involved, they may cause instability in the market, which could temporarily contribute to the electronic components shortage.
For example, the consolidation could lead to reduced competition in the market, which may result in potentially higher prices for components. They can also lead to changes in the production and distribution of the electronic components they produce, which may cause disruptions in the supply chain and affect the availability of specific ones.
One possible reason for the current global shortage of electronics components is the recent purchase of Apple chipmaker Dialogue Semiconductor by Renesas Electronics, valued at approximately $4.9 billion. The acquisition will enhance the presence of Renesas in the Internet of Things, industrial, and automotive industries.
Other recent deals that may have temporarily contributed to the shortage include the acquisition of US digital engineering services company, GlobalLogic, by Japanese electronics and construction giant Hitachi, in a $9.6b deal. Swedish PCB supplier NCAB also acquired PreventPCB, a leading PCB supplier in Italy, in a $17.1m deal.
9. Effects of the US and China Chip War
China is a leader in the semiconductor industry. However, the US has been working to slow down its progress in the sector. Advanced chips are essential for military hardware, AI, and supercomputers, making its use of the technology a perceived threat to US national security, especially given the ongoing conflict in Ukraine waged by Russia.
In October, the US government announced that companies exporting chips to China are henceforth be required to obtain licenses if they use American tools or software, regardless of the production location. They also forbid US citizens and green card holders (US permanent residents) from working for certain Chinese chip companies.
The restrictions on technology exports to China will hinder its development of advanced semiconductors in the short and long term. Meanwhile, China has labeled these controls “technology terrorism” and filed a complaint with the WTO, claiming that the US is using export controls to maintain its dominance in technology industries.
China’s inability to access US technology and talent due to the conflict is causing a shortage of electronic components in China. As a result, the production of advanced semiconductors is slowing, leading to disruptions in the global supply chain for electronic components and having a ripple effect on electronics production.
10. Impact of Global Economic Inflation
Inflation is driving up the cost of raw materials and other resources used in producing electronic components. As prices for raw materials and other inputs continue to rise, manufacturers of electronic components are finding it increasingly difficult to maintain profit margins while maintaining competitive prices for their products.
The manufacturers face a difficult decision; absorb the costs of rising raw materials or pass them on to consumers, which may lead to a loss in market share to competitors with lower prices. Either way, inflation is causing a challenging operating environment for manufacturers, thus contributing to the global electronics component shortage.
Global economic inflation has also caused an increase in transportation costs, which makes it more expensive to ship electronic components around the world. It has further exacerbated the global electronics component shortage, as manufacturers can’t efficiently move their products to where they are needed.
Conclusion
The electronic components shortage is a complex and multifaceted problem that requires a concerted effort from all stakeholders to resolve. By addressing the root causes and implementing necessary solutions, the electronics industry can overcome this challenge and continue thriving in the face of increasing demand.
