So, what are semiconductors and where are they used?

Microchips are the basis of the technology that we use every day. But if earlier it was more about "complex" technology like smartphones and laptops, then today's dramatically smarter watches, light bulbs, coffee makers and machines also need microprocessors and microcontrollers. In a car, electronics may be needed for a parking system or an on-board computer, a smart coffee maker needs a processor to communicate with a smartphone, and a smartwatch, for example, now requires an LTE module. Microcircuits are printed on silicon wafers consisting of small semiconductor crystals, which have one interesting property ― they conduct electricity not as well as metals, but also not as badly as most insulators. In fact, a semiconductor is a critical element of any electronics, whether it's a NASA supercomputer, a smart coffee maker, a brand-new Apple Watch or an old Japanese TV.

Silicon shortage, production crisis and the role of TSMC

Silicon is needed for the production of semiconductors. Although the natural reserves of silicon are huge — it is 28% of the mass of the earth's crust, but metallic silicon used in microchips and the automotive industry requires special processing, so it so happened that the extraction and processing of silicon is now concentrated in China. And at the end of 2019, the Chinese government launched a policy of reducing energy consumption, which affected both the amount of silicon produced and prices.

The second much bigger problem was the shortage of chip manufacturers. In 2000, there were several dozen large manufacturers of integrated circuits in the world, now all production has been outsourced to Asia, where the Taiwanese company TSMC rules. This is the brainchild of the former head of Texas Instruments, Maurice Zhang, who in the early 80s went home to build his successful business. There he realized that it was more profitable for him to produce semiconductor wafers for other IT giants of the caliber of Dell, Intel and Huawei, rather than engage in independent development of processors or memory chips.

As a result, TSMC has become a monopolist in this area — even conditional AMD, which in fact is a manufacturer of chips, outsources most of the work to Taiwan. Therefore, the more expensive the production of chips becomes, the stronger TSMC's positions become.

Where and why did they disappear?

In 2020, the pandemic disrupted the delicate balance in the electronics market, as if a couple of hungry tigers were released to the beach to the sloths. Due to massive lockdowns and misunderstanding of what will happen next, production chains have strayed. The demand for microchips has grown due to the computerization of cars, lockdowns have been reported in countries where chip factories operate, and due to the massive transition to remote work, the demand for laptops has increased, which further aggravated the situation.


At the end of 2020, car and electronics manufacturers in Japan, South Korea and China started talking about the shortage of chips. Then the reason for the shortage of chips was called wholesale purchases of chips by Chinese tech giants Huawei Technologies and Xiaomi, a fire at a chip manufacturing plant in Japan, and lockdowns in Southeast Asia. According to data at the beginning of 2021, the demand for chips exceeded the supply by 10-30%. Then the shortage quickly spread to the market of consoles and graphics cards. The crisis hit all spheres at once, both fast-growing ones and those that sit quietly in the corner and do not touch anyone.

Which industries have suffered the most

Initially, we were talking about computer equipment ― primarily graphics cards, which are bought by miners, and computers / laptops, the demand for which has grown dramatically after many companies switched to work from home. A little later it turned out that everything was not so simple, and the automotive industry, the communications sector, the giant smartphone market, game console manufacturers and even the military suffered from the shortage of semiconductors. On the slide below you can find out how many resources each industry needs.

In the first months of the crisis, it was projected exclusively on the graphics card market, after which gamers went into a holy war against miners. On Twitter, that's for sure. At the same time, the heads of Apple, Samsung and other smartphone manufacturers assured their fans that there would be no shortage. A little later, Apple CEO Tim Cook changed the record, they say some details will be in short supply, but this will not affect the overall picture, you should not worry, everyone will get their iPhone.

However, immediately after the presentation of the iPhone 13, Bloomberg published material that Apple was still reducing production rates by 11%. Broadcom and Texas Instruments remained the extreme ones, which could not establish the production of components for Face ID and wireless communication modules in the right volume. In parallel, Samsung and Xiaomi complained about the lack of components. All this leads to the fact that smartphone manufacturers either refuse to enter non-native markets, or raise prices. For example, Google has already announced that the Pixel 5a will be sold exclusively in the United States and Japan. And Xiaomi is already raising prices on some popular smartphones. So the official price of the Redmi Note 10 rose by 8% from $161 to $174.


And while smartphone manufacturers were looking for a solution, a mixture of excitement and horror reigned in the computer market. Inspiration because the pandemic led to a severe overheating of the market ― many people switched to homework and took care of buying a work computer or laptop. According to various sources, laptop sales in Europe and the United States increased by 40-48% during the pandemic. In general, the global PC market, which includes all laptops, desktops and workstations, reached the mark of almost 80 million active units in 2020. According to Canalys, this is the highest market growth in the last 10 years.


Well, the horror was caused by the fact that soon it would all end, because there definitely wouldn't be enough good for everyone. It hit artists, designers, animators, visual effects specialists, game developers and other specialists whose work directly depends on the power of the computer. Previously, most had home laptops and computers for preparatory work, and all serious work was carried out on powerful workstations. Now these workstations had to be built at an exorbitant price at home.

Oh, and there's nothing to say about the graphics card market. Remember the announcement of NVIDIA Ampere, when the head of the company Jensen Huang promised that the RTX 3060 card would tear everyone and everything, giving gamers the popular 4K? So, she really broke up, but a year later, instead of the promised $ 400, the price tags for her start at $ 1,000 and can reach $1,500 for versions with powerful overclocking and triple cooling. And all because, in parallel with the shortage of semiconductors, a new wave of mining fever began. After the bitcoin exchange rate broke through the ceiling of $ 50,000, buying a graphics card even with a double markup began to be considered luck. As a result, 2021 was held under the slogan "sometimes they come back", and gamers around the world got a unique opportunity to buy a new, old GeForce GT 1030 or 1050 Ti at exorbitant prices.

In August 2021, Sony CFO Hiroki Totoki promised investors that the company would ship the promised 22.6 million PlayStation 5 consoles to Sony by the spring of 2022. We don't know if investors believed him, but gamers immediately remembered a meme about an animator cat who doesn't believe anyone and doesn't expect anything. Despite the cheerful tone of Sony representatives, most of the living people have seen the new generation consoles only in pictures. The crisis has greatly overheated the industry, the promised $500 immediately turned into $ 1,000, and most of the copies sold hang out on the trading floors of resellers.

To the cry of gamers "how long will it last"? the guys from Toshiba answered. As it turned out, they have been working hard for the last year, and their managers are solving issues with deliveries over the phone around the clock, but this is not enough. According to them, they will not be able to release the promised number of memory controllers, so the shortage of consoles will last at least until the end of 2022. Each manufacturer reacted to this news in its own way. The head of Xbox, Phil Spencer, is pushing for the development of services a la Gamepass and NVIDIA Now with which gamers will be able to play new games without wasting the last money to buy games and hardware.

According to Bloomberg, Sony will go the other way and change the design of the PS5 printed circuit board again. Or he will find a new supplier, which is unlikely. Well, Nintendo has already pulled off a similar trick with the new Switch console. While all the fans were waiting for the new Switch Pro with a 4K screen, the Japanese limited themselves to a modification with an OLED display. Judging by the ornate statements of their management in the current conditions, they physically could not reassemble a new batch of consoles.

It also hit other industries that, at first glance, have nothing to do with high technology. For example, in the automotive industry. It's no secret that today's cars are increasingly turning from mechanisms into gadgets. And it's not just about "smart" Teslas and green electric cars stuffed with electronics, but literally about any modern car. According to a Bloomberg report, in the period from the early 70s to the end of the 2020s, the cost of electronics increased from 5% to 45%! Semiconductors and control controllers are needed for the correct operation of parking, glass collectors, wipers, audio system, navigation, on-board computer, etc. As it turned out, the automotive industry was completely unprepared for the crisis. While the IT giants complain about the deficit, simultaneously registering record revenues, the Ford giant missed almost $2.5 billion by the end of 2021, General Motors predicts a loss of about $2 billion in revenue, and Nissan has not yet counted all the losses, but has already suspended its production in Mexico and the USA.


Unexpectedly for many experts, the crisis hit not the laptop market or Apple's revenue, which did not sell a pack of new iPhones, but the industrial sector. The fact is that most electrical goods use technologies of the past or the generation before last, and many vital things like the fire system controller board are built on developments from the early noughties. All this logically led to a widespread rise in prices.

For example, the penny microcontroller STM32F103RCT6 on Aliexpress has risen in price by 10-15 times and has practically disappeared from sale. The same thing also affected other similar trifles. What is happening goes against the desire of IT giants to keep up with progress. For example, Hynix, which is the world's largest manufacturer of RAM chips, dreams of starting mass production of DDR5 memory from the end of 2020. Going back 10 years ago in the days of the company's DDR3 is neither interesting nor financially profitable.

When will things get better?


TSMC says that the lines are loaded to the brim, but they still can't cope with the pace of production. In a recent statement from the company, the forecast has changed again ― previously they promised to overcome the crisis by the end of 2021, now they advise to tighten their belts for at least the whole of 2022. In this case, the question arises, why not expand production?

It is this issue that all the big fish in the IT industry are now concerned about. Intel has announced the creation of a separate semiconductor division of Intel Foundry Services (IFS), which has already invested $ 20 billion. This money will be spent on the construction of two new factories in the United States. Intel's new CEO Pat Gelsinger believes that the emergence of another player in the chip market will help solve the demand in any industry — from gaming to automotive. TSMC, under pressure from Apple and Qualcomm, announced that in the next 3 years it will invest about $ 100 billion in the expansion and modernization of already built factories.


In parallel, TSMC announced the creation of a joint venture with Sony Advanced Semiconductor Manufacturing (JASM). A new factory has been built for him in Japan, which will manufacture chips exclusively according to outdated 22- and 28-nm technological processes, which will help to cope with the shortage of semiconductors in the automotive and industrial sectors. The preliminary cost of the project will be $7 billion.

However, it is not worth hoping for an early transformation. According to Adam Khan, the founder of AKHAN Semiconductor, a broad supply crisis may last until the second quarter of 2022, and he considers such a scenario as "encouraging". Well, it may take a decade to fully adapt to the new realities of the semiconductor industry.

There are several reasons for this. Firstly, a lot of time was lost. Due to the initial optimistic forecasts, manufacturers were in no hurry to invest in production lines, so that later it would not turn out that there was no one to sell additional products later. Secondly, the construction of one or two factories globally will not solve anything. According to TMC forecasts, the new line in Arizona, in the production of which about $ 20 billion has been invested, will be able to cover no more than 2% of the total annual volume of semiconductors produced.


Thirdly, and this is very important, haste is not beneficial to everyone. For example, no matter how NVIDIA's management swears at miners and apologizes to gamers, the company makes excellent money on the current situation. Financially, 2021 was a record year for it ― net profit increased from $662 million to $2.37 billion compared to last year, NVIDIA's share price increased more than 2 times, and the company overtook such giants as Visa, JPMorgan and Walmart by market capitalization. What can I say if in 2021 they released a miner version of the old GTX 1660 graphics card with an official price of $ 720. Although at the time of release in 2019, it cost no more than $ 250. Judging by quarterly reports, many other IT giants of the caliber of AMD, Apple and Intel have also noticeably risen in price.