It’s 2023, and a recession is looming. Don’t take it from us. Economists are saying there’s a 70% chance of a recession occurring this year. And real information is difficult to find. People are looking for reliable information on inflation and oil prices, not to mention chip shortage updates. While all of these issues are interconnected, a very important sector to look at is the global semiconductor market.
Semiconductors power nearly every piece of hardware you can imagine. Our world runs on it. smartphones, vehicles, machinery, production lines, wearable technology, the list goes on. Since 2019, accurate and reliable information regarding global events has been very difficult to come by. We’ve done lots of research about what is being said about the chip shortage and want to provide our own account of the situation. This is based on our company’s experience and production efforts during this time as well as dozens of companies we know who use semiconductors in their manufacturing.
WHAT CAUSED THE CHIP SHORTAGE?
There is no doubt that the pandemic has triggered a cycle of events that have led to negative impact on individuals and business. It’s quite a complex phenomenon but there are many factors that have caused the global chip shortage. Here are just the main ones.
China’s policy differed from the West dating all the way back to 2019. If there was so much as one positive covid case, factories would shut down. China just so happens to be one of the largest suppliers of semiconductors and other input products to the rest of the world. If factories aren’t operating, production halts to a stop and no one can get their chips. Let factories get locked down just 2 or 3 times a month and you will begin to see a backlog of orders.
Another problem with completely halting operations is that China’s manufacturing is heavily connected to other markets such as Japan, South Korea, Hong Kong and Taiwan. Some companies rely on Chinese products to build their own, and then sell to another buyer. The same way other countries depend on China to purchase components from them. If manufacturing facilities are down, they are ordering less parts from other countries and their production begins to stall.
RISING FEUL COSTS
Petroleum prices have nearly doubled since 2020 but slowly making its way downward in 2023. In history, we have seen a strong correlation between oil and gas prices and the economy. If the first one goes, then the latter is likely to follow. As we have seen I the 1973 oil crisis and also in 1979. This situation is not much different.
Some will dispute the reason behind the rising fuel costs but one thing for sure: it started shortly after the conflict between Russia and Ukraine began almost a year ago. All of Europe has been heavily dependent on Russian fuel for decades. It’s close, inexpensive, and easy to transport. Ever since the majority of the Western world placed heavy sanctions on Russia, they had to find alternative sources. Prices went up due to a cut off of the second largest petroleum producer in the world.
There are nearly $1 million truck drivers in the United States who move close to 75% of total goods in the country. Think of the impact fuel costs have on delivery costs. These costs are passed down to the consumer.
This all ties back to the semiconductor business. It’s becoming more expensive to ship devices. For this reason, inflation on consumer electronics is likely to grow faster than average. Or even think about everything that uses microchips; tractors and factories. Producers and farmers will need to raise their prices as well.
GLOBAL SUPPLY CHAIN BREAKDOWN
This is an extension of the prior cause. Yes, the supply chain issue is caused by the chip shortage. Less chips being produced, less necessary components being delivered to factories thus halting production lines at companies like Ford, Honda, and pretty much every auto company on the planet.
Rising fuel costs have decreased the demand for container ships coming from China as well. Shipping companies cannot send half empty ships anymore due to such high costs. They need to wait for containers to be filled before shipment. And that takes a long time.
Obviously, this happened a long time ago but we have really started to see the impacts of globalization these past two decades. First with the financial collapse of 2008 and now. When so many countries become intertwined and dependant on each other, if one piece of the chain breaks, the whole structure could collapse. For this reason, many countries are now taking the necessary steps to reduce reliance on countries like China, Russia and Iran.
In one of the major chip shortage updates, the Biden-Harris administration signed the CHIPS and science act to begin producing more electronic components in the United States. In the hopes of ridding the country of the dependence on China and Taiwan and also creating a new prosperous industry.
WHICH INDUSTRIES ARE AFFECTED BY CHIP SHORTAGE?
As stated earlier, basically all industries rely on microchips and semiconductors. But there are some that have been hit significantly harder than others.
You’ve probably seen this all over the news. Factories all over the world including Ford and BMW have significantly decreased operation capacity. Some facilities have even completely shut down for the time being. Car dealerships are waiting one, sometimes 3 years for a new car to be produced. For this reason, used car sales have skyrocketed. Just look at Tesla. They have a long line of customer eager to get their butts into the Cybertruck. Elon Musk has reassured us all that this vehicle will be released sooner rather than later.
Even for companies like Apple that control the entire manufacturing process, the chip shortage has been an issue. Pair this with higher input costs and you begin seeing lower demand for brand new iPhone and Samsung Galaxy products. Among the many chip shortage updates in 2023, Samsung is predicting the shortage won’t last too long. That’s as of Jan 2023.
Everything from smart watches, fitness bands and other wearables have seen a significant drop off in terms of sales and new product development. The latter is an important thing to note. With the heavy uncertainty, R&D of hardware products diminishes. Less new products being developed, which slows down the innovation of tech companies. Even we run a portion of our production in China. At this time, it’s almost impossible to get over there. But as of recent, some major restrictions have been lifted and the Chinese government is granting easy entry for companies looking to conduct business with local manufacturing.
CHIP SHORTAGE UPDATES (FROM THE INSIDE)
As a wearable tech company, we do in fact communicate with other companies (not just wearables) about these manufacturing issues. Most of us have crossed paths in the past so we’re always in touch to figure out the inside scoop from other company’s perspective. There is high optimism that soon the doors to China, Taiwan and Hong Kong will open up. But for some industries, it’s not looking so bright.
Speaking with two large auto manufacturers (one vehicles, another heavy machinery), I hear that their problems are the same as they were 6 months ago. With these types of machines, there are thousands of different components that are coming from different countries and cities. It will take a long time to get such a massive production line back on the gears, so to speak. if we’re talking about smaller products, like wearable tech, that might be easier to stabilize. Needless to say, this has been a challenge for all tech companies and will definitely have an impact on operational decisions going forward.
IMPACT OF THE CHIP SHORTAGE GOING FORWARD
Everyone is monitoring this situation closely. Investors will think twice before investing in a hardware company. Why not just invest in software? It’s easy! No components, no hassle. Company executives are thinking about how to get control back. Corporations have already began lobbying governments (in US and elsewhere) to have more control of the manufacturing process. De-globalisation, if you will.
Many are worried about a future event similar to this occurring. There is worry, globally, about China and Russia. They control most of the world’s natural resources and China controls manufacturing. There is now a concerted effort to wean off Chinese and Russian products. While this will take years, maybe decades, for many it’s viewed as a step in the right direction.
WILL THE CHIP SHORTAGE EVER END?
It’s the million-dollar question. Of course, the answer is, yes! But different industries will recover at different rates. As we can see, the smartphone market is ready to go. Samsung has already projected their highest earning quarter, Q1 2023. Apple should have no issues bouncing back either. Wearable technology is coming back slowly, but the innovation will lag. The biggest question mark we have is the automotive industry. we’re hearing all of the right things from car executives, but can we trust them? At this time, all we can do is hope and push through because there is a light at the end of the tunnel.