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Why The World Is Short of Computer Chips?


An abrupt and cascading shortage of semiconductors has caused  car manufactures and premium bike makers curtail production across categories.


GS-III: Industry and Infrastructure (Industrial Policy and Indigenization of Production and Technology, Government policies and Interventions)

Dimensions of the Article:

  1. Why are semiconductor chips important?
  2. Why are there shortages?
  3. What is the impact of the chip famine?
  4. Indian electronics sector

Why are semiconductor chips important?

  • The number of transistors mounted in IC circuit chips has doubled every two years.
  • Notably, the increase in chip consumption over the last decade is also partly attributable to the rising contribution of electronic components in a car’s bill of materials.
  • Electronic parts and components today account for 40% of the cost of a new internal combustion engine car, up from less than 20% two decades ago. Chips account for a bulk of this increase.

Why are there shortages?

  • The stay-at-home shift: This pushed chip demand beyond levels projected before the pandemic. Lockdowns spurred growth in sales of laptops to the highest in a decade. Sales also jumped for home appliances, from TVs to air purifiers, that now come with customized chips.
  • Fluctuating forecasts: Automakers that cut back drastically early in the pandemic underestimated how quickly car sales would rebound. They rushed to re-up orders late in 2020, only to get turned away because chipmakers were stretched supplying computing and smartphone giants like Apple Inc.
  • Stockpiling: PC makers began warning about tight supplies early in 2020 and then around the middle of 2020 – they began building up inventory to ensure it could survive U.S. sanctions that were set to cut it off from its primary suppliers.

What is the impact of the chip famine?

  • Consumers of semiconductor chips, which are mainly car manufacturers and consumer electronics manufactures, have not been receiving enough of this crucial input to continue production.
  • Chip shortage is measured in chip lead time, which is the gap between when a chip is ordered and when it is delivered.
  • With just-in-time deliveries, carmakers typically kept low inventory holdings and relied on an electronics industry supply chain to feed production lines as per demand. There were two reasons for this: a steady decline in input prices and improvements in the processing power of chips.

Indian electronics sector

  • The Indian electronics sector is tremendously growing with the demand expected to cross USD 400 billion by 2023-24.
  • Domestic production has grown from USD 29 billion in 2014-15 to nearly USD 70 billion in 2019-20 (Compounded Annual Growth Rate of 25%).
  • Despite the impressive growth of electronic production in India, the net value added by production units is very low. The net value addition ranges between 5% and 15%, as most components are imported rather than locally sourced.
  • In the era of global supply chains, the value addition at the final stages of production is very low, especially in electronics because the more complicated processes, involving greater value addition, occur prior to assembly, in ‘upstream’ industries.
  • Currently, these imports nearly constitute 80% of these components, with approximately 67% of the imports coming from China alone.
  • In the absence of foundries (semiconductor fabrication plants where microchips are produced), India has to rely on foreign contractors to produce microchips. – [There are about 170 commercial foundries globally but India does not have a single one.]
  • Chip manufacturers like Intel, TSMC and Samsung choose other countries instead of India citing uncertain domestic demand and poor cost efficiencies here.

-Source: The Hindu

December 2023