Over the past few months the prevalence of online articles discussing this chip shortage phenomenon flew under our own radar for quite a while. It was a few months ago after seeing three separate articles on the topic in the same day we knew it was time to do some research. The downsides, however, are that a lot of these stories were focusing on individual elements of a much larger systemic issue: this shortage and following crisis is at fault.
In this article we will try and break down what the storage chip shortage is and how it’s manifested so far, showing how it links to the larger issue at hand. By the end of this piece we hope you have a much deeper understanding of how this situation is unfolding and also see the industry with a slightly more critical eye in a mission to avoid falling to the chain of events which has led us here.
Our language might sound too sensational for the matter in hand, but the global effect of this shortage is of measurable consequence. The past year in the news you may have come across news stories talking about a shortage in the new games consoles, or a shortage in car parts, or the worldwide graphics card shortage all have their roots in the storage chips which they utilise. These chips are types of semiconductors and they hold such an important role in every part of our world, from the electrical components in fridges and radios, to the machines which assemble these items in the factories, expanding all the way into the military, this type of technology is everywhere, so when we see the shortage which we are experiencing today, we can see how wide reaching the effects of this are.
One of the biggest companies who have publicly come out on this issue is General Motors, who have had to scale back and pause production of their vehicles at many plants due to the limited availability of the components. The devastating effect of this wasn’t just felt in the USA however with Honda and Toyota shutting four plants in Japan temporarily in response to this shortage. In all this global uncertainty within the automotive industry the consultancy firm AlixPartners released a press release stating that “The Semiconductor Shortage to Cost Global Automakers $110 Billion in Revenues this Year.”
Another reason why the automotive industry plays such a large role in the use of the semiconductors is due to the increased complexity of automobiles and all the extra electrical or computerised components now needed for each device within the vehicle.
With the US’s dependency on its automotive industry this shortage pushed President Joe Biden to sign an executive order on February 24th 2021, which ordered a review into the supply chain of semiconductor parts within the US. This review was to see how dependent the US was on imports of these semiconductors from abroad and how best to prepare to avoid a shortage like this in the future.
The question most people will be asking at this point is: ‘What actually caused all this?’ How did we go from a free flowing market of products to a global shortage threatening the economies of countries world wide? It’s hard to pin any of these issues on a single event but it’s more of an amalgamation of many issues that have arisen during the COVID-19 pandemic.
At the start of the pandemic the world had to adjust to the new normal. More people working from home, needing new laptops, or new computer upgrades. All this added a consumer boom to the electronics market with record sales being recorded within the first few months. We also saw a similar boom coming from the business side of technology upgrades. With the new systems in place businesses needed to implement them to do remote working efficiently, which also caused a buying spree on the electrical hardware needed to upgrade their infrastructure.
Couple this high demand with the already peak demand for graphics cards that we have witnessed globally for the increased interest in the mining of different cryptocurrencies. This has caused a rise in cases of warehouses around the world being filled with rows and rows of computers with graphics cards. Even before we saw the rise of graphic cards being used for cryptocurrencies, ASCII miners were used to mine Bitcoin before which also rely on this chip storage tech which is in short supply.
The increased boom of cryptocurrencies trying to get a grip on the global financial market through the use of advertising their wares is only compounding the problem; plenty of unaware individuals being sold the idea of becoming a first-time investor and getting rich quick means more of a spotlight has been put on their development. Like the dire straits found in the housing market, people with too much money are buying up as much stock as they can get their hands on, then trying to return said stock at an extortionate price to increase the value of it. And unfortunately, enough people are happy to pay this amount resulting in the current loss. This means more chips need to be produced, which not only cause further pointless damage to the environment but also means the new produced stock can be bought up as well. The cycle is set to continue unless action is taken.
We touched on this in our previous article on the topic of how much damage NFTs are really doing to the planet. Since that article was published the NFT ‘boom’ has thankfully died down, but the prevalence of blockchain used in crypto is still on the rise. Warehouses filled with microchips and graphics cards that are meant for consumers are being bought in bulk by said cryptocurrency developers, driving the price and demand up needlessly. A typical individual looking to buy any similar wares is going to find themselves priced out of the market if this sharp increase continues to grow. Essentially, if you are sick of watching the price for a new graphics card for your gaming PC going up on an almost daily basis, then we need a complete overhaul of cryptocurrency to stop the hoarders getting richer.
The final main noticeable area in which this shortage has had an effect is in the world of video games consoles. Months before the world was placed under lockdown we saw the release of the PS5 and the Xbox One X, with pre-orders and waiting lists growing as people struggled to get their hands on one of these consoles. As the demand increased the more affected the production got by this shortage.
Usually, in situations where you know there is increased demand for a product which you sell, it is usually a good idea to order more base materials for your items so you can produce more to meet this increased demand. The issue with this however is where every company producing electrical goods are all seeing this increase in demand at the same time it causes a bottleneck on the production side. Even before COVID-19 there was always a set amount of semiconductor chips produced daily in all the factories around the world, meaning a shortage is possible on paper if demand ever got that high. However, with the reduced production output available due to the pandemic reducing the numbers which can word in a given space gave a real big hit on the production number of these components.
This caused a feedback loop as all companies tried to get ahead of this shortage caused by the demand by ordering even more of these semiconductors in anticipation. This has led us to where we are today, where production is trying to catch up to all the orders placed over the past 18 months. Really the first signs in which we might have foreseen an issue like this was in the shortage of games consoles just months before this pandemic got into full swing.
A lesser commonly known use of these components is their use in medical equipment. The fact the globe has had to deal with a public health crisis when the components needed for producing new machines are in short supply is surely going to have a knock on effect for years to come in the ability for all hospitals to have the equipment they need.
As the global news started making these links between the independent events and started covering the chip shortage a lot of theories started circulating the internet. Many different commentators are trying to sum the entire situation up in a short statement, not fully appreciating how this is a result of a system operating on the system of perpetual growth. If the standard practice for companies in a time of unprecedented demand is to just order more and more fails to take into account the finite amount of time, labour, materials in the global production of everything. As population increases and the global demand for consumer products rises we are going to see similar global production shortages in other areas in the future.
What has caused this apparent contradiction between what makes “business sense” to do and what actually makes sense to do? In Nathaniel’s own opinion, “I put the fault at the way the entire approach to business is. When many different companies are all operating and using the same supply lines, cooperation, not competition, should be the way of managing this to prevent and prepare for issues like this before.”
In the panic of the mass buying and demand we discussed earlier in the article, companies put their own future profits ahead of the real world understanding about what a mass increase of orders of a material globally will do to the supply chain. If organizations communicated and realized there will be a mass global demand for these components, then a regulatory body should have been set up externally or by the organization involved to allow for a rationed equal distribution of these to prevent such a large shortage hitting the supply lines.
This event has shown the fault lines in the lack of preparation for fluctuations in the supply chain, and this needs to be a wakeup call to all industries to prepare logistically. Whilst the occurrence of a global pandemic wasn’t anything the general public could appreciate could happen before the event, but governments, companies and countries have been researching and discussing the ever present risk of a global viral infection, with the effects of production already being well forecasted. You would think when these large companies tasked with the use and maintenance of the logistics of this supply chain would have put contingency plans in place in case such a predictable shortage like this has happened.
Seeing as how this article is reporting on events that have already happened, we can only wait in fervent anticipation to see if the collectives will look around and see the potentially endless damage that could be done from short-sighted business decisions and selfish stock hoarders trying to squeeze money out of investors with fancy-sounding offers. Action needs to happen sooner rather than later, both on an individual basis and a business one.
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