Demand side factors

One reason for the shortfall is the spurt in demand for these chips. The global lockdown led to sharp rise in demand for PCs, laptops, smart phones as well as gaming consoles as billions were just confined to homes. Even cars are getting smarter and that has also grown the demand for these chips. Add to all this, due to the sanctions imposed by the US on China, they have gone ahead and literally hoarded chips worth $400 billion. Among other things, the panic factor has also led to spurt in demand. 

Supply is extremely sticky

The global chip industry is specialized and supply takes time. The biggest chip names like NVIDIA and Qualcomm only design the chips. These chips are made by the likes of TSMC of Taiwan and Samsung of Korea. A unit to make chips is called a Fab and a typical Fab entails billions of dollars in investment as well as manufacturing precision of a high order. So, it is not like any country can just come and replicate chip making as it takes 2-3 years to set up and all chip factories around the world are running to capacity. The biggest challenge is the ability to make chips with low wastage. 

Things will not change soon

Demand is likely to remain robust for now. Apple and Samsung consume chips worth $110 billion each year. The global auto industry needs chips worth $38 billion each year and it is lower on the pecking order of chip companies. The pandemic lag effect and the higher use of chips in almost every product is an indication that this demand supply gap is only going to widen till the time fresh capacity comes up. That would take nothing less than 3-4 years. To add to this story, Trump notified a ban on supply of inputs to SMI of China, which makes 10% of the chips. That policy looks unlikely to change under Biden.  

Implications for India too

It is estimated that in the current year the sales of global automobiles could fall by $60 billion due to shortage of chips. That would be a setback to the green car transition of Indian autos, which are extremely chip heavy. In addition, India is planning to manufacture billions of dollars-worth of mobile phones, routers, networking products, set-top boxes and IOT products as part of Atma Nirbhar project. All these are chip heavy and this shortage could have big impact over next few years. In addition, we may face a situation where cars, white goods and TV sets are manufactured but can’t be sold due to the chip shortfall. If this chip shortfall is not planned for, it will be a massive headwind for India!