Shortage of Computer Chips

  • IASbaba
  • January 3, 2022
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  • GS-3: Science and Technology- developments and their applications and effects in everyday life. 
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Shortage of Computer Chips

Context: Carmakers slashed production. Broadband providers faced monthslong delays for internet routers. All of these phenomena and more had a similar cause: an abrupt and cascading shortage of semiconductors. 

  • Also known as integrated circuits or more commonly just chips, they may be the tiniest yet most exacting product ever manufactured on a global scale.
  • The combination of cost and difficulty in producing them has fostered a worldwide reliance on two Asian powerhouses — Taiwan Semiconductor Manufacturing Co. (TSMC) and South Korea’s Samsung Electronics Co.
  • That dependence was brought into stark relief when the Covid-19 pandemic and rising U.S.-China tensions made chips scarce. 
  • Hundreds of billions of dollars will be spent in the coming years in a global race to expand production, with geopolitical as well as economic implications.

What is a chip?

  • It’s the thing that makes electronic items smart. 
  • Made from a material, usually silicon, that “semi-conducts” electricity, the chip performs a variety of functions. 
  • Memory chips, which store data, are relatively simple and are traded like commodities. 
  • Logic chips, which run programs and act as the brains of a device, are more complex and expensive. These often carry names like Apple or Nvidia, but those companies are actually just the designers of the semiconductors, which are manufactured in factories called foundries.

Why is it so hard to produce chips?

  • Manufacturing advanced logic chips requires extraordinary precision, along with huge long-term bets in a field subject to rapid change
  • Plants cost billions of dollars to build and equip, and they have to run flat-out 24/7 to recoup the investment. 
  • Also, factory also gobbles up enormous amounts of water and electricity and is vulnerable to even the tiniest disruptions, whether from dust particles or distant earthquakes.

Who are the major players in chip manufacturing?

  • TSMC (Taiwan company) pioneered the foundry business — purely manufacturing chips for others — with government support in the 1980s. Its share of the global foundry market is larger than its next three competitors combined.
  • Samsung dominates in memory chips and is trying to muscle in on TSMC’s gold mine. 
  • Intel Corp. is the last U.S. heavyweight in the field, but its business is heavily concentrated in manufacturing its own-brand chips that serve as the central processing unit (CPU) for laptops and desktop computers.

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. Home networking gear, webcams and monitors were snapped up as office work moved out of the office. 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 which caused mismatches in production & demand.
  • Stockpiling: PC makers began warning about tight supplies early in 2020. Then around the middle of that year, Chinese company Huawei Technologies Co (dominates the global market for 5G networking gear) began building up inventory to ensure it could survive U.S. sanctions that were set to cut it off from its primary suppliers. Other companies followed suit and China’s chip imports climbed to almost $380 billion in 2020, up from about $330 billion the previous year.
  • Disasters: A bitter cold snap in Texas in February led to power outages that shut semiconductor plants clustered around it; it was late March before Samsung’s facilities there were back to normal. A plant in Japan belonging to Renesas Electronics Corp., a major provider of automotive chips, was damaged by fire in March, disrupting production for months.

Who is affected?

  • Chip shortages are expected to wipe out $210 billion of sales for carmakers this year, with production of 7.7 million vehicles lost.
    • Toyota Motor Corp. suspended output at 14 plants in September.
  • Samsung warned that it saw a “serious imbalance” in supply and demand globally. It is forecasted that the shortages could extend into 2022. 
  • Some broadband providers were facing delays of more than a year when ordering internet routers. 
  • Apple said in April that supply constraints were crimping sales of iPads and Macs, which it said would knock $3 billion to $4 billion off its third-quarter revenue. 

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