What caused the global chip shortage?

Between turning off your morning alarm and driving to work, most people use dozens of microchips without even realizing it.

Those chips are the brains inside products like cellphones, washing machines, electric toothbrushes and so much more.

Right now, there is a worldwide shortage of those chips, which means businesses are adjusting and tech experts are advising consumers on how to avoid paying higher prices.

As the world shut down because of the COVID-19 pandemic, many factories closed with it, making the supplies needed for chip manufacturing unavailable for months.  The pandemic caused an explosive surge in demand for devices. People were at home, using more tablets, phones and other streaming devices than ever before, and the need skyrocketed beyond what manufacturers could provide.

Bad decisions by the auto industry also added to the shortage. When COVID started, many companies canceled their orders for chips because they assumed the economy was about to take a lengthy hit. Car companies in particular canceled orders, so chip companies switched to making chips for consumer products, attempting to meet the explosive demand caused by the pandemic. Having retooled their plants to make chips for consumer goods instead of cars, a shortage of car chips ensued.

There aren’t many chip manufacturing plants in the world, and the few that were running during the pandemic were subject to a series of unlucky weather events that delayed the manufacturing process further. Japan’s Renesas plant, which creates almost one-third of the chips used in cars around the world, was severely damaged by a fire, while winter storms in Texas forced some of America’s only chip plants to halt production. Producing these chips also requires a lot of water, and severe drought in Taiwan has also affected production.

But the issue wasn’t just with manufacturing. As COVID made its way through Asia, ports shut down, sometimes for months. Once the ports reopened, bottlenecks emerged because of the buildup of items waiting to be shipped. Many parts of the transportation supply chain don’t have the capacity to handle this buildup, or the labor shortages that have been occurring, plunging the supply chain into further crisis. 

For chip-reliant companies, the shortage has caused a supply chain bottleneck, forcing many to slow or halt production. Of the industries impacted, the automotive industry has taken the hardest hit, as it has become increasingly reliant on semiconductors. With most semiconductor manufacturers focusing on consumer electronics, automotive companies found themselves at the back of the line for new chips. Many car manufacturers, including Ford Motor Co. and General Motors Co. were forced to shut down plants temporarily. Ford and GM are both expecting to see individual earning cuts of over $2 billion.

The auto industry has not been alone in its struggles amid the global chip shortage. Electronics and appliance companies have seen similar bottlenecks in their respective supply chains. Washers and dryers have also seen production delays and low output, driving prices up and forcing consumers to settle for products that differ from their preferred options.

Although the current chip shortage has caused an economic disturbance, it is important to remember that high demand is promising, and low capacity is temporary. Semiconductor companies are continuing to expand, and governments are seizing the opportunity to invest in one of the fastest growing industries in the world. Looking past fear-mongering reports and low short-term output, we see that the chip shortage indicates long-term economic expansion.