The Chip Shortage Isn't Ending Anytime Soon

How the semiconductor shortage happened and why it's likely to linger

Apr 21, 2021
Decision, Operations and Information Technologies

SMITH BRAIN TRUST  The semiconductor industry is relatively opaque to a lot of people. “We buy potato chips; we don’t buy computer chips,” said Maryland Smith’s Suresh Acharya in a recent interview with SupplyChainBrain. It was his opening to his explanation of a global semiconductor shortage affecting consumers of TVs, smartphones, games consoles and even automobiles.

The pandemic hit the auto industry especially hard, notes Acharya, professor of the practice in the Department of Decision, Operations and Information Technologies. Sales slumped in the first half of 2020, and the auto industry pulled back its orders involving semiconductors. Then as sales recovered, auto manufacturers found chip factories unable to meet their demand for semiconductors, forcing them again into curtailed production.

The pullback by the auto industry coincided with surging demand from the consumer electronics industry. While the pandemic curbed car-buying, people staying at home were buying laptops, computer games and other devices. As a result, chip factories shifted production away from less-sophisticated semiconductors required for autos.

Also feeding the chip shortage: COVID-related factory closures in Asia and tension in U.S.-China trade. The latter prompted Chinese companies to actively stockpile semiconductors and diminish the supply for export. More than 90% of chips consumed globally are made in Asia “And while 50% of global demand comes from the U.S., only 12% of total production occurs here,” Acharya said. Such disparity, he added, leads to long supply chains and the risk of further disruption.

Acharya also said the Biden administration’s recent executive order to review critical supply chains, including those of semiconductors, is unlikely to affect the supply-demand gap in the short term.

Building new plants is a lengthy and expensive process. But the present shortage will balance out gradually, he said. Some of the companies that have stockpiled likely will reduce such activity to reduce much-needed capacity.

“This is a very cyclical industry. This is not the first time we have seen semiconductors have an imbalance in supply (more in 2019) and demand (more in 2018),” Acharya said. But the issue as it surrounds the auto industry “will stabilize a bit, but we won’t see the end of it until the end of the year.”

In the longer run, Acharya recommends that companies invest in AI-driven, end-to-end supply chain visibility solutions, such as a Control Tower, to detect and rectify upstream supply challenges. “Likewise, it has become increasingly important for organizations to create a diverse and resilient supply chain – one that is not prone to a single point of failure.”

Hear more of Acharya’s insights at SupplyChainBrain’s “Why is There a Global Semiconductor Shortage?” and at SiriusXM’s BYU Radio’s “Chip Shortage.”

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About the Expert(s)

Suresh Acharya is Professor of Practice at the Robert H. Smith School of Business. Suresh has spent nearly 25 years designing and building statistical and optimization solutions in the areas of Supply Chain Management, Retail Planning, Airline Operations, Logistics, and Pricing and Revenue Management. As a practicing analytical professional and Chief Scientist of JDA Software, Suresh continues to work with Fortune 500 companies in delivering practical algorithmic solutions that demonstrate measurable customer value. Suresh teaches the Capstone course for the MSBA students and advises students on career options in analytics. He has a Masters in Mathematical Sciences from Clemson University and a Masters in Operations Research from the University of North Carolina. 

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