Highly concentrated industryBut the biggest issue is the...

Highly concentrated industry

But the biggest issue is the structure of the industry and its inflexibility.

“While it is easy to blame the pandemic for this situation, the truth is that the global semiconductor supply chain had this coming for some time,” wrote tech consultant and Cambridge University visiting fellow, Hamza Mudassir on website The Conversation.

By some accounts, Taiwan’s TSMC accounts for more than half the $110bn annual revenues of the semiconductor manufacturing industry. In second place, South Korea’s Samsung is on about 20 per cent. Between them, their foundries or fabrication plants – chip speak for factories, make more than two thirds of the world’s semiconductors.

“The entry barriers into semiconductor manufacturing are astronomically high,” said Mr Mudassir.

“There’s a steep learning curve required to set up a foundry, entailing an upfront investment of US$10-$12 billion (A$13-$15bn) and then at least three years to become production ready.”

Politics has also played a role. The US has begun restricting China’s access to chips, which in turn led Chinese tech giant Huawei to stockpile semiconductors while it still could, further soaking up supply. China is now trying to expand its own chip foundries as part of the “dual circulation” strategy to be less reliant on the US.

“But the straw that finally broke the proverbial camel’s back was the sharp rise in bitcoin prices in early 2021,” said Mr Mudassir.

“This increased the demand for the graphics processing units that are traditionally used in mining the digital currency, exacerbating the semiconductor supply issues further.”

Bitcoin mining is where individuals verify other bitcoin transactions to build trust in the digital currency and receive bitcoin in return for their troubles. It takes up a lot of computer brain power.

Ford has been hit hard by the global chip shortage (07/26/2010)Source:Supplied

Car companies made a bad bet

In the midst of the pandemic many car companies made a bad call that has led the vehicle industry to be the hardest hit so far by the chip shortage.

“They had been expecting lower demand, given that car sales tend to move lower in an economic downturn,” said Mr Mudassir.

“This, however, proved to be an erroneous assumption, as new car sales started bouncing back quickly by the tail end of 2020.

“Automotive companies tried to re-book previously cancelled semiconductor orders only to discover that home electronics manufacturers had taken their place,” he said.

On Thursday, motor giant Ford said it planned to stop production at six factories, five in the US and one in Turkey, as a direct result of not being able to get enough chips to stick in its vehicles.

Last month, Ford said it expected the semiconductor crisis could cost it as much as A$3.2bn.

Ford is not alone. Rival General Motors has said semiconductors could take $A2 billion of its bottom line this year. Honda, Nissan and Volkswagen have also flagged slowdowns.

According to Reuters, industry research firm AutoForecast Solutions estimated Ford will lose production of almost 408,000 vehicles that it intended to build this year due to the lack of chips. Globally, the chip hit could see almost 700,000 fewer vehicles built.

Consultancy firm AlixPartners has forecast car manufacturing alone could see US$60.6bn ($A78.5 billion) wiped from the bottom line, reported CNBC. Across all industries it could end up being far more than that.

Creating semiconductors is an expensive and detailed process meaning there are only a few global manufacturers.Source:Supplied

Australia’s lack of semiconductor industry a ‘sovereign capability risk’

The answer might seem to be to ramp up chip production.

“The difficulty is due to the huge costs and lead time associated with new foundries, you can’t fix the problem by just turning on another tap,” said Prof Rabeau.

The Sydney academic authored a report last year for the New South Wales Government looking at how the state, and Australia as a whole, could participate in the semiconductor industry.

“Australia is not really a part of this industry in any meaningful way,” he told news.com.au.

That means domestic industries rely on overseas manufacturers for chips.

“In terms of that sovereign capability, Australia has an increasing risk that it is dependent on countries which down the track we may not be able to rely on.”

That could be a thorny geopolitical issue if China’s posturing about invading Taiwan ever turns into reality given 63 per cent of the world’s chips are fabricated on the island.

Taiwan makes two thirds of the world’s chips.Source:Supplied

The US Government has persuaded Taiwan’s TSMC to invest $A15 billion in a new plant in Arizona to spread the supply chain around. That might not work for Australia.

“It would be high risk to suddenly dump several billion dollars into a fab plant in Australia when you don’t know ongoing demand,” Prof Rabeau said.

Rather, his recommendations include investing in more niche areas of the industry, helping “fabless” firms that design but don’t manufacture chips and setting up a “semiconductor sector service bureau” to help build the industry.

Australia wouldn’t become Taiwan overnight, but it might set the country on the semiconductor fabrication road and leave it less at the mercy of supply chains and possible shortages.

Customers the losers

“In the near term we’re just going to have to struggle through and wait for chips.

“Whether that becomes the norm, it’s hard to say,” said Prof Rabeau.

Mr Mudassir said the winners were the chip manufacturers who have seen their share prices soar.

“It is only a matter of time before tech manufacturers and retailers decide to increase prices to match the high demand and low supply of the components,” he wrote.

“Just like in an actual famine, the end consumers of these goods are going to be significantly worse off.”