Explained | What is the global chip shortage

Explained | What is the global chip shortage

High demand, tightened supply and unscrupulous characters have all contributed greatly to the rampant chip shortage

Representative image. Credit: iStock.

Looking to buy a graphics card? A games console? A new laptop? Sorry, you're out of luck as there is barely any stock anywhere, and whatever is there is often marked up highly.
The cause is simple: There is a global shortage of silicon chips, be it small, big or complex devices. But have you wondered why this shortage is so rampant?

Semiconductors, commonly made from silicon, are the heart of most modern technology. The phone you are using has a CPU. Your PC too has one. Semiconductor is a widespread technology that form the heart of most processing systems in the world.

What is a semiconductor?

All modern computer chips are powered by millions or even billions of tiny electronic switches called transistors. These transistors are made by printing electronic circuits onto semiconductor discs called wafers. Since the days of the Intel 8008 microprocessor, computer chips have grown exponentially more powerful, and their designs have become equally complex.

And this is where the problem begins. Making these chips is extremely hard, with specialised companies handling the process.

Why is it so hard to make chips?

The answer is ironically a lot simpler than the manufacturing process involved. Companies such as Intel, TSMC and Samsung run specialised factories called 'fabs', which literally fabricate the chips.

The process is immensely complex, requiring several steps, and since the transistors are so tiny, even a speck of dust can ruin an entire wafer, leading to potentially hundreds of wasted chips. This is why fabs are built in some of the cleanest places in the world, following extremely strict sanitation standards.

It's not cheap to put a fab together either. Constructing and equipping even one fab can run a company into billions of dollars and take years to complete.

So how does that cause the shortage?

Every major chip company, be it AMD, Nvidia, Apple or Intel, run their own fabs or licence fabs to build their designs for them. AMD and Apple typically contract TSMC, while Intel runs its own fabs. On the oter side, Nvidia has adopted a mixture of TSMC and Samsung for its graphics cards.

And while all these factories combined can output millions of chips every year, impact of the Covid-19 pandemic made all the difference.

In essence, as countries went into lockdown and people starting working from home, demand for laptops and PCs skyrocketed. This led to significant pressure on fab companies, which typically allocate their output to companies, who then have to sub-allocate what they get to their product portfolios.

Read | Global chip shortage threatens production of laptops, smartphones and more

AMD is a particularly egregious case of this: The company makes CPUs and GPUs for PCs, laptops, and a large number of semi-custom designs like console chips, and this thins the number of wafers they can allocate for each product line. Nvidia, too, suffers the same issue, but to a lesser degree since it makes GPUs for PCs, laptops and enterprise purposes. All this has put a tight squeeze on fabs' output and companies' product stocks.

And though the companies are able to sell every chip they make due to the extremely high demand, not all of the chips are going to customers.

Scalpers and miners

Scalpers are people who buy up items on bulk at the market rate and resell it for a quick profit. Earlier, scalping was conducted on ticket sales, and was present in the technology industry to a small degree, but between the pandemic, the launch of the new Xbox and PlayStation and higher demand, they have increased the activity manifold.

Essentially, these scalpers write software called bots to scrape ecommerce sites like Amazon, Newegg to track arrival of a product's new stock, and buy it in bulk. Then they resell it on sites like eBay and Craigslist for high margins, sometimes exceeding 100 per cent.

The other group is the miners. With the recent cryptocurrency boom, sales of computer components have often gotten snatched up by people who run dozens or even hundreds of these in vast arrays to perform complex calculations to "mine" cryptocurrency like Bitcoin and Ethereum.

In this situation, the customers are bearing the biggest losses, often sitting on long waiting lists, or caving into scalpers' demand and paying a premium.

How long will the chip shortage last?

No one knows for certain. While certain products like CPUs and smartphones are in relatively normal supply, GPUs and game consoles are likely to face shortages till the second half of the year, if not longer.