Chip shortages and the rising cost of hardware

Why is there a shortage of chips and other hardware?

1. Global Demand

Global semiconductor sales were up 18% between May 2021 and May 2022, and demand shows no signs of slowing. Chips are vital to businesses across countless industries, and are often required in large quantities. From automotive and consumer electronics to telecommunications and the data centre, transnational organisations require these components for their products and internal infrastructure. 

In order to be profitable, manufacturers will fabricate the same chip in large quantities, meaning they often cannot respond to demand for other products once production is underway. Switching back and forth between different designs is costly and difficult - meaning purchasers have to be mindful of catching a production cycle at the wrong time.

2. COVID-19

Chip manufacturers were hit hard throughout 2020 and 2021, with pandemic-induced downtime resulting in a massive backlog of orders. Lockdowns forced many fabrication companies in the US and Far East to close temporarily, which has stunted the rate of production. Not only this, but the entire supply-chain was also affected, from the mining of raw materials, to design and distribution.

Today, lead times for chips on an established production line can already exceed 4 months. Production of a single chip can have upwards of 1500 steps to complete, with hundreds of variables and quality control processes to navigate along the way. Chips may also need to be altered from their off-the-shelf state to fulfil the needs of the company purchasing them. This makes the process even longer, as bespoke design and fabrication processes need to be factored into the production schedule.

3. Hoarding and political tensions

Many companies that need semiconductors are rethinking their long-term procurement strategies. Some, for instance, are shifting from a ‘just in time’ ordering model, which is more streamlined and reduces inventory costs, to instead order semiconductors far in advance and stockpile them ‘just in case’.

This approach skews the supply chain and the wider market. Not all companies can afford to accumulate chips in this fashion, which piles further pressure to over-pay for the inventory they need, and wait longer to get hold of it. 

Political tensions have played a part too. In 2020, it was reported that Chinese companies began stockpiling semiconductors as they feared they could be placed on a US trade blacklist. Companies in the West found themselves at the back of the queue, particularly in the automotive sector, having previously cancelled orders during the pandemic.

4. Weather 

It is not only the political climate that has had an impact. Extreme weather as a result of climate change has compounded the problem. Fabrication plants in Taiwan now experience chronic periods of drought on a regular basis, affecting both chip manufacturing processes and the hydroelectric power supply they rely upon. In Texas, unprecedented snowstorms in 2021 resulted in catastrophic power failures, costing Samsung, Infineon and NXP hundreds of millions of dollars.

The impact of outages and downtime can render an entire batch of products unusable, as they need to be fabricated in a clean room environment with pure air and closely controlled temperatures. The time taken to power back up from an unexpected outage can take months.

What can I do about it?

1. Reduce reliance on hardware 

Public and private cloud services can help relieve the burden of sourcing and deploying hardware that relies on chips. Of course, the cloud providers themselves are subject to the same pressures as anyone else in the market. However, their size and global clout generally affords them stronger purchasing power, allowing them to maintain a healthy inventory more easily than smaller organisations.

By placing workloads in the cloud, you pass the burden of hardware procurement and management to your provider. They become responsible for scaling and upgrading their physical footprint, whilst you simply pay to utilise it. For hardware that you continue to operate, consider whether it’s possible (and appropriate) to implement virtualisation techniques. There could be efficiencies to be made with what you have already, instead of going out to source more.

2. Standardised designs and flexible architectures

Cloud-based technologies will usually only reduce chip reliance for internal workloads and applications. Some organisations simply require chips in order to build their products, and going to market to procure them is unavoidable.

In these scenarios, consider ways to standardise a product design so that it can utilise ‘off the shelf’ components with minimal bespoke elements. If possible, look to a flexible architecture that allows you to switch from one chip to another in the event of a particular shortage. Think about how software could be used to reduce your dependency on silicon.

3. Tracking the supply chain

Lead times are long, which means it’s more important than ever to pre-plan your hardware requirements, and order well in advance whenever you can. In a rapidly-evolving technology market, this is not an easy thing to predict, but there are ways to improve your supply-chain resilience.

It is important to have a well-defined risk management process in place. The leadership team should regularly review supply chain risks, and be able to respond quickly when signs emerge that action is required. Work with product and technical teams to understand just how reliant you are on hardware, and the consequences of something going wrong.

For procurement teams, work to foster relationships with existing suppliers, and if you can, obtain regular updates on availability and lead times. Explore partnerships with multiple suppliers so that you have somebody else to turn to in the event of a shortage.

4. Build a strong, resilient Digital Foundation

A Digital Foundation is the blend of technologies, skills and processes that an organisation has in place to operate and drive growth. A strong Digital Foundation provides the business with the ability to adapt and evolve as macro factors outside of its control - such as the pandemic, climate crisis, supply chain issues and war, to name just a few that we have encountered recently - create instability and unpredictability around it. This fragility creates uncertainty that must be mitigated and managed.

All organisations, big or small, must identify and understand the specific risks to them created by the evolving political and economic landscape, including issues like the chip shortage. We passionately believe the solution lies in the right combination of technology and people. We’d love to hear what you think. Get in touch here!