The invention of chips is a major breakthrough in the development of electronics, as they are inexpensive to produce, require little material, consume little energy and are at the heart of all the digital products we use massively, such as cell phones, computers, televisions and automobiles.
A chip is a tiny element, made of a semiconductor material that can act as an insulator or conductor and consists of numerous integrated circuits that allow the development of various functions in electronic devices.
An integrated circuit, on the other hand, is a system made up of several electronic elements that are miniaturized and are housed in the same support made of a semiconductor material.
A microprocessor, specifically, is the most complex integrated circuit in a computer system. By analogy, is it often called the «brain of a computer».
Well, among the many consequences brought about by the confinement due to the pandemic that has hit us since the beginning of the year 2020, we find the massive sale of computers so that people could work or study from home, via online. Likewise, sales of other devices that also use microprocessors increased, so that many people in the world could occupy their free time, hence the demand for chips was and still is very high, while production is still insufficient.
The case of the automotive industry is very particular, because due to the dynamics of production, they do not accumulate supplies, including microprocessors for computers.
The technology companies that manufacture these chips had already warned that they were beginning to face limitations in meeting the demand for these indispensable inputs. The issue is that new automobiles usually include more than 100 microprocessors in their manufacture, so when they were unable to obtain these electronic devices in sufficient quantities to assemble their vehicles, they had to change their line production.
Computer microprocessors are not observable with the simple eye, yet they are at the heart of all the digital products around us and when supplies run low they can even halt the manufacturing process of those products. Last year when gamers struggled to buy new graphics cards, Apple had to stagger the launch of its iPhone and the latest Xbox and PlayStation consoles could not meet demand due to shortages. The problem was looming larger every day.
This is how experts in the digital area foresaw that the automotive industry would face what was called «the Armageddon of the chips». Part of the problem stems from the fact that new cars often include more than 100 microprocessors and manufacturers could not get them all. Since then, technology companies that produce this integrated circuit have warned that they also face limitations.
Following the countries’ battle to cope with Covid-19, the automotive industry experienced a major shortage of microprocessors as chipmakers shifted their production lines, while demand for consumer electronics continued unabated. What has been the reaction of microprocessor manufacturers worldwide? Recently, TSMC and Samsung, the leading chip producers, spent billions of dollars to accelerate a new 5-nanometer chip manufacturing process to push the latest cutting-edge products. But analysts say the industry has underinvested. «Most tier-two foundries have posted meager profits, low margins and high debt ratios over the past few years,» says a recent report from Counterpoint Research.
From a profitability perspective, it is difficult to consider building a new manufacturing plant for smaller foundries. The raw material on which the technology that produces microprocessors is based is silicon, because it is a material that can conduct electricity. However, building more microprocessor factories is not a simple matter. With existing foundries still working at full capacity, according to analyst Richard Windsor, «it would take 18 to 24 months to open a plant after you start building it.» He adds that «even once you’ve built it, you have to adjust it to increase production, which also takes a bit of time. This is not something you can just turn on and off.
A separate issue is that many of these chip producers will respond to additional demand by raising their prices. «That’s going to represent some rigidity at the leading edge that would extend through 2022,» according to research from Bank of America. (Computing, 5G chips). In this regard, one chipmaker told The Wall Street Journal that the backlog of orders is so large that it would take up to 40 weeks to fulfill any order an automaker places today. This situation could generate costly side effects. The consulting firm AlixPartners has predicted that the auto industry will lose $64 billion in sales because it has had to shut down or reduce production. However, that sum must be seen in the context of an industry that generally turns over around US$2 trillion in sales per year.
This shortage of microprocessors involves geopolitical frictions. For example, the United States still leads in terms of component design development. But Taiwan and South Korea dominate the chip manufacturing industry. In that context, Lombard Rory Green (TM economist) estimates that the two Asian nations account for 83% of global processor chip production and 70% of memory chips. In a comparative description, as was OPEC for oil, Taiwan and South Korea are monopolistic chip producers. That has raised concerns in the United States. In connection with this issue, a group of 15 senators wrote to President Biden urging him to take steps to «incentivize domestic semiconductor production in the future.»
But we could say that the most affected country is China, which manufactures more cars than any other nation. Based on that assessment, the research firm IHS predicts that there will be a huge decline in vehicles in that country. Beijing has always wanted China to become more self-sufficient in semiconductors. But the U.S. has taken steps to block local companies that use U.S. know-how to do so, on the grounds that they also supply the Chinese military.
The current crisis will not only give China’s leaders reasons to redouble their efforts, but it also exposes how disruptive it would be to realize another of their ambitions: unification with Taiwan. Another collateral problem is that smaller brands may be disproportionately affected. Experts estimate that the cost of servers and data center equipment could skyrocket in a few months.
Incidentally, time brings us closer to a historic date. It was on November 15, 1971, when the United States introduced the first microprocessor to the world.