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The semiconductor crisis that started in 2020 due to the global lockdown seems to be lingering on. The demand for semiconductor chips, also known as integrated circuits, has been greater than its supply. It has adversely impacted 169 economies and has resulted in a massive increase in semiconductor prices. Apart from the pandemic, the economic conflict between China and the United States have also contributed to this crisis. The ongoing war between Russia and Ukraine have aggravated the situation.

Effect of the Russia-Ukraine war

The war is expected to have far more consequences than was previously envisaged. Experts believe that as the nations at war directly control the supply of major raw materials required for making semiconductors, the continuing shortage problem will increase in the next few months. A report by the US commerce department has shown that the global chip shortage was just being partially covered when the war broke out between two powerful nations. As a result, the prevailing crisis is expected to continue in the later part of 2022 as well. The raw materials like palladium, used in sensor and memory chips, neon gas used for etching circuit designs into silicon wafers, are all exported majorly from Russia and Ukraine. More than 44% of the global palladium supply is in Russia’s hand whereas Ukraine produces nearly 70% of the global neon supply. At risk elements like aluminium, nickel, and cast iron are also present. If the war scenario continues further then the supply of nickel, which is already running low, the sectors impacted will suffer more and there will be a price hike in the automobile industry. The tension between two such important nations will result in prices of electronic goods and components to increase by 1% to 3% in the first half of 2022.

Other reasons

The covid pandemic is not the only reason behind this supply crisis. Natural calamities like a winter storm in Texas and a massive fire in a factory in Japan had resulted in the shutdown of manufacturing plants. Moreover, a huge water crisis had broken out in Taiwan affecting the Taiwan Semiconductor Manufacturing Company (TSMC) which is one of the crucial producers of Apple’s M1 chips. The trade war between the US and China has also contributed to the crisis.

This crisis has affected most of the industries ranging from automobile, smartphone, personal computer to consumer appliances. Moreover, the freight cost has also been rocketing since the war broke out, thus making the situation worse. According to a survey report consisting of 150 firms, the supply of semiconductors has decreased from an average of 40 days’ worth in 2019 to five days in late 2021. The Indian automobile industry is also likely to get caught under the prevailing geo-political crisis. As per an outlook report by Federation of Automobile Dealers Association (FADA), the war effect is not neutral but is rather negative for the industry. The supply of personal vehicles is supposed to face the ultimate consequence. The industry has already been running at a loss, according to sales data of February 2022, where vehicle retail has fallen by 9.21% on YoY basis.

The lockdown period has resulted in the shift of work mode from offline to online. Therefore, the demand for connectivity has led to the increase in demand for electronics like computers, laptops, video games, communication devices - all of which require semiconductors. The automobile industry of India is already suffering due this disruption and customer demands are already at a queue. In this case, long term strategies like being self-sufficient in important production areas like semiconductor manufacturing, should be stressed on. India has already committed to invest $10 billion in the semiconductor producing industry which is expected to bear fruit in near future.