Semiconductor shortage leaves digital transformation in limbo

The situation results from a severe chip shortage that has lingered for at least one and a half years and is expected to persist for much longer. Now manufacturers of cars, graphics cards, video game consoles, computers, and other products that require semiconductors face price increases, shortages, and queues, hitting enterprises and consumers alike with equal intensity.  Consulting firm AlixPartners expects the crunch to cost $110 billion in revenue in 2021 to the global automotive industry alone.

The shortage is the result of a perfect storm of supply and demand. Rapid digitization of the last few decades has seen semiconductors integrated everywhere, from fridges to drones and everything in between. The average electric car, for instance, is packed with roughly 3,000 chipsets. In fact, according to an analysis by Goldman Sachs, a whole 169 industries have been hit by the global chip shortage.

The second reason is COVID-19 which not only shut down foundries but also exposed inherent vulnerabilities in the global supply chain networks. Related to this is that the pandemic forced most people online for work, education and shopping, which led to a sharp increase in demand for computing devices. Research firm IDC reported a 26.1% increase in shipments of PCs in the fourth quarter of 2020. “Every segment of the supply chain was stretched to its limits as production once again lagged behind demand during the quarter,” noted Jitesh Ubrani, a research manager with IDC.

Third, ill-timed trade disputes between the US and China aggravated the situation as Chinese device makers resorted to stockpiling semiconductors in anticipation of sanctions.

A shift in the digital landscape

Where does this leave digital transformation?

Manufacturers of the equipment that run our digital world are feeling the pinch. The CEO of Arista Networks, Jayshree Ullal, one of the world’s largest data center networking switch vendors, admitted in an earnings call in May 2021 that the shortage is affecting supplies. “The supply chain has never been so constrained in Arista history. To put this in perspective, we now have to plan for many components with 52-week lead time,” he said.

Ironically, the semiconductor squeeze may accelerate digital transformation for enterprises. Faced with a shortage of servers in the market on the one hand and the need to continue supporting the digital tools that employees and customers have come to rely on, the only viable for enterprises is a shift to the cloud. Glenn O’Donnell, Research Director at research firm Forrester in a blog posting in September 2021, said shifting more capacity to the cloud is an option that many organizations are exploring. “Basically, what you’re doing is kicking the can down the road to the cloud providers and let them worry about the semiconductor shortage,” he said.

There’s no short term relief to the shortage, with Intel CEO Pat Gelsinger warning that the deficit will last until 2023, as demand continues to soar even as semiconductor manufacturers rush to expand production. “It just takes time to build this capacity to respond to the spike,” Gelsinger told media while announcing a $7.1 billion investment to expand Intel’s back-end manufacturing capabilities in Malaysia.

Confronting the problem head-on

The only long-term solution is to massively scale the production of chips, which, luckily, vendors have pledged to do. Samsung has said it will build a $17bn semiconductor factory in Texas, US, operational in the second half of 2024. Intel also announced a $95 billion investment in Europe over the next decade. The largest chipmaker globally, Taiwan-based TSMC, has said it plans to invest $100 billion over the next three years to increase capacity at its plants. Meanwhile, GlobalFoundries, owned by Abu Dhabi’s Mubadala Investment Company – which raised nearly $2.6 billion in an IPO in 4Q 2021 – aims to increase its production capacity by almost 50 per cent in the next three years to address.

But scaling is easier said than done. For one, semiconductor manufacturing is an expensive and highly complex operation. To understand the scale of the challenge, you only need to consider a company called ASML. To manufacture the advanced chipsets in your phone requires a so-called Extreme Ultra-Violet (EUV) lithography machine. Dutch-based ASML is the only company globally that can build the EUV machine and which all major semiconductors vendors such as Intel and Samsung rely on. These machines cost $145 million each and require six fully-loaded Boeing planes to transport.

No one said digital transformation was easy. Any CIO who has embarked on a digital transformation journey will admit as much. The semiconductor shortage is a bump on this long and circuitous journey. Short term disappointment should not take away the value that digitization adds to society.