Why is there a Chip Shortage? The Semiconductor Supply Chain, Explained

There is much talk about semiconductor stocks hobbling amid several challenges. However, to better understand why the semiconductor supply chain is being clobbered, it makes sense to understand how delicately the semiconductor supply chain works. Once that is clear, it will be easier to see why the global chip supply chains are braced for further disruptions.

A Brief Look into the Supply Chain

The global semiconductor network is an intricate system where each link holds the entire chain together, forming the backbone of the expanding digital economy. Simply put, chip designing is carried out by fabless semiconductor companies like Qualcomm (NASDAQ:QCOM), Broadcom (NASDAQ:AVGO), Advanced Micro (NASDAQ:AMD), and Nvidia (NASDAQ:NVDA), which then outsource their manufacturing to partner foundries in China, Taiwan, and South Korea, where silicon wafers are processed, assembled, and sent back to the companies.

These chips are then sent to original equipment manufacturers in China and elsewhere, where they are integrated into technologies such as smartphones, computers, servers, data centers, memory storage, industrial and consumer electronics, automobiles, and wired/wireless infrastructure.

As simple as this looks, each major step involves several processes, which are carried out at different facilities. The reason the entire chain is so widespread is due to the concentration of skilled or cheap labor and infrastructure in various parts of the world. The semiconductor sector is somewhat oligopolistic, meaning certain regions and companies dominate different sections of the vast value chain, making the entire chain globally interconnected.

The Global Chip Supply Chain Pain and China’s Role in It

The emergence of the COVID-19 pandemic began with lockdowns in China, putting an abrupt restriction on China’s semiconductor trade with the rest of the world.

Simultaneously, automakers around the world, anticipating a drop in car sales, suspended large volumes of production. This weighed on chip demand as the auto sector is one of the biggest markets for semiconductors.

Now, as China continues to grapple with one COVID-19 surge after another, the country recently shut down the Huaqiangbei district, which held the world’s largest wholesale electronic market, as part of its zero-COVID-19 policy.

Not only that, the weakening demand for PCs due to prolonged periods of delays and cancellations in supply is an added pressure on global chip demand.

High interest rates and input costs are making the chip-making process all the more difficult, a trend that is expected to continue for some more time. This will not only exacerbate the global chip shortage but will also contribute to the global economic slowdown that the world is so worried about.

Evidently, the U.S. imposing restrictions on chip exports to China is like loosening a key link in the entire semiconductor value chain. The U.S. is worried about China’s growing efforts to expand its influence on global economies.

To that end, China’s increasingly advanced economic espionage efforts prompted the Biden administration to up the ante in restricting chip sales to China, knowing how hard it would strangle the Chinese chip manufacturing industry, which is one of the largest in the world. This, in turn, will dent the revenues of industries all over the world that directly or indirectly depend on China’s chip manufacturing.

Conclusion: The World Will Adjust Sooner or Later

The fragility and interconnectedness of the semiconductor value chain are making investors worry, and rightly so. This is not just another country’s industry that has been restricted, but the second largest economy and one of the three biggest chip manufacturing countries of the world.

However, it is true that attempts by China to take over as the world’s largest superpower by dominating the backbone of the digital world will most likely be thwarted in the immediate future. This will force chip markets in other economies to expand.

Also, over the long term, the U.S. will likely successfully cut its dependency on China for manufacturing and sales, making American chip giants self-sufficient in a super-industry that has no way but to grow.

What do analysts think about these leading chip stocks? Learn more on TipRanks:

  • GlobalFoundries Inc. - GFS
  • Nvidia - NVDA
  • Advanced Micro Devices - AMD
  • Qualcomm - QCOM
  • Intel - INTC
  • Micron - MU
  • Broadcom - AVGO
  • Texas Instruments - TXN


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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