June 16, 2021

The Global Chip Shortage and its Effect on the Electronics Industry

If you’ve purchased any electronic equipment recently, you may have experienced the following:

  • Longer wait times before orders ship
  • You were forced to select an alternate brand or model due to items being out of stock
  • Increased prices

The reason, at least in part, is the global shortage of semiconductors. Lead times for these “chips” are pushed out as far as one year, and these semiconductors are used in most devices people use daily.

The shortage has caused headaches in many industries, but one of the main is the automotive industry. Many in this field have been forced to scale back production. Other car manufacturers are modifying their design, so they don’t have to rely on as many chips. Some of those modern “bells” and “whistles” that we’ve come to expect in new automobiles will be left out in favor of getting a newly manufactured car on the lot or in the showroom.

Although the automobile industry has been hit extremely hard, they aren’t the only ones feeling the effects. If car factories are sitting idle because there are no chips, the same is happening for electronics, technology, networking equipment, and medical devices.


Where Are the Chips?

The majority of chip production, especially for advanced computing chips, now occurs in Asia, where major contract manufacturers handle production for hundreds of different chip companies. The bulk of the world’s chips are made in China (roughly 75%), while the U.S. is the second largest producer. 

As millions of Americans are being vaccinated, the outlook for a U.S. economic rebound has become much more optimistic. Supply chains have faced major challenges during the pandemic, and the challenge to meet the expected surge in demand is something that each business must plan for.

Chipmakers are investing in new production capacity, but it can take up to two years to set up the complex facilities, and the cost of building a new facility is prohibitive to many manufacturers.


The Covid Factor

Some countries still have factories closed or partial labor forces, so production is not yet back to full capacity. If there are lockdowns due to Covid outbreaks, it could very well wreak havoc on already stressed supply chains. We’ve seen examples of this already taking place with multi-week shutdowns.


Ramping Up Production

Business groups have reached out to President Biden recently to ask for assistance and grants to encourage new chip factories to be built in the U.S. instead of overseas. Congress did authorize programs last year to provide incentives for chip research and factory construction, but U.S. lawmakers still need to provide specific funding for the program. Additionally, the groups are asking for investment tax credits, that can help offset the cost of chip manufacturing tools. Those costs can add up to billions of dollars for newly constructed factories.

Most experts expect additional capacity to come and a return to a more balanced situation, but the effects of the semiconductor shortage will be felt well into next year, possibly longer.


Beware of Fake Chips

Many companies will frantically try to find alternate ways to purchase and stock up on chips, or risk shutting down temporarily. This situation is ripe for electronic component counterfeiters to step in and prey on those that are desperate to keep their business running.

Companies that are especially at risk are those that are low-volume manufacturers that have a less established supply chain and haven’t been proactive in purchasing stock. The effects of counterfeit chips could be disastrous for multiple critical industries including healthcare.

Business leaders need to resist the urge to jump and purchase chips as soon as they see or hear about availability. If it sounds too good to be true, most times it likely is.


Ways to Manage Your Business During the Chip Shortage

Having a supply chain that is flexible and able to adapt to changing global conditions is critical to your success. The semiconductor shortage is another challenge that businesses will have to manage in order to ensure survival.

Businesses need to stay alert and follow established purchasing procedures and work instructions to vet prospective chip distributors. Be sure to investigate, audit and double-check information on any of these companies before ordering. If someone promises they can provide you chips immediately, that should be a big red flag.

Lead times will continue to be longer than normal for the foreseeable future. Clear communication with customers is something that can alleviate stress on both sides. Be open, honest, and transparent with where things stand. Consumers should realize that there will most likely be delays along the way.

A quality manufacturer will work with customers to identify long lead time components, review their forecast, discuss safety stock, buying strategy, and look at alternate possibilities to reduce any risk to their production line.

Plan ahead, expect some delays, and be flexible.

Sanbor Medical specializes in contract manufacturing exclusively for the electronic medical device industry, and utilizes a global supply chain to identify and correct any vulnerabilities before they become a disruption.

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