For the most part they go unseen but computer chips are at the heart of all the digital products that surround us – and when supplies run short, it can halt manufacturing.

There was a hint of the problem last year when gamers struggled to buy new graphics cards, Apple had to stagger the release of its iPhones, and the latest Xbox and PlayStation consoles came nowhere close to meeting demand.

Then, just before Christmas, it emerged the resurgent car industry was facing what one insider called “chipageddon”.

New cars often include more than 100 microprocessors – and manufacturers were quite simply unable to source them all.

Since then, one technology company after another has warned they too face constraints.

Samsung is struggling to fulfil orders for the memory chips it makes for its own and others’ products.

For the most part they go unseen but computer chips are at the heart of all the digital products that surround us – and when supplies run short, it can halt manufacturing.

There was a hint of the problem last year when gamers struggled to buy new graphics cards, Apple had to stagger the release of its iPhones, and the latest Xbox and PlayStation consoles came nowhere close to meeting demand.

Then, just before Christmas, it emerged the resurgent car industry was facing what one insider called “chipageddon”.

New cars often include more than 100 microprocessors – and manufacturers were quite simply unable to source them all.

Since then, one technology company after another has warned they too face constraints.

Samsung is struggling to fulfil orders for the memory chips it makes for its own and others’ products.

And Qualcomm, which makes the processors and modems that power many of the leading smartphones and other consumer gadgets, has the same problem.

Pandemic’s impact

Like much else wrong with the world, the coronavirus is partly to blame.

Lockdowns fuelled sales of computers and other devices to let people work from home – and they also bought new gadgets to occupy their time off.

The automotive industry, meanwhile, initially saw a big dip in demand and cuts its orders.

As a result, chipmakers switched over their production lines.

But then, in the third quarter of 2020, sales of cars came roaring back more quickly than anticipated, while demand for consumer electronics continued unabated.

5G infrastructure

With existing foundries running at capacity, building more is not a simple matter, though.

“It takes about 18 to 24 months for a plant to open after they break ground,” analyst Richard Windsor says.

“And even once you’ve built one, you have to tune it and get the yield up, which also takes a bit of time.

“This isn’t something you can simply switch on and switch off.”

The rollout of 5G infrastructure is also adding to demand.

And Huawei put in a big order to build up a stockpile of chips before US trade restrictions blocked it from ordering more.

By contrast, the car industry is relatively low margin and tends not to stockpile supplies, which has now left it in a pinch.

Recently, TSMC and Samsung, the leading chip producers, have spent billions getting a new highly complex 5-nanometre chip-manufacturing process up to speed to power the latest cutting-edge products.

But analysts say more widely, the sector has suffered from under-investment.

“Most of tier-two foundries have been registering poor earnings, low margins and high debt ratio during the past few years,” a recent report from Counterpoint Research says.

“From the profitability perspective, building a new fab[rication plant] for smaller foundries is difficult to consider.”

And many of these chip producers will instead respond to the extra demand by increasing their prices.

Knock-on effects

Mr Windsor does not expect chip scarcity to be resolved until at least July.

Others suggest longer.

“We expect semiconductor industry supply constraints on both wafer and substrates to only partially ease in second-half 2021, with some leading-edge (computing, 5G chips) tightness to extend into 2022,” a Bank of America research note says.

And one chipmaker told the Wall Street Journal backlogs were now so big, it would take up to 40 weeks to fulfil any order a carmaker put in today.

This could have expensive knock-on effects.

The consultancy AlixPartners has forecast the automotive industry will lose $64bn (£47bn) of sales because it has had to close or reduce output.

Although, that sum needs to be viewed in the context of the sector typically generating about $2tn of sales a year.

Monopoly producers

There are also geo-political implications.

The US still leads in terms of developing the components’ designs.

But Taiwan and South Korea dominate the chip-manufacturing industry.

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