Global Chip Shortage: Bullwhip Effect Is Worsening Semiconductor Crisis

Semiconductors are the engine of the modern economy. These chips are the brains of millions of devices, including spacecraft, automobiles, computers, smartphones, medical equipment and appliances, among others. As of 2021, the global semiconductor market was worth $527.88 billion.

Understandably, the ongoing shortage of chips has majorly affected several sectors, including automotive, consumer electronics, LED and lighting fixtures. 

According to an analysis by Goldman Sachs, the semiconductor shortage touches 169 industries.  

Many companies in these sectors are trying to address the problem by stockpiling as much as they can, but this has left other businesses, especially smaller ones, struggling. 

A key reason for the disturbed supply and demand dynamic can be explained by the bullwhip effect, which refers to demand distortion that travels upstream in the supply chain, from retailer to manufacturer and suppliers. The distortion is created when orders are larger than actual sales. 

The chip shortage has prompted many companies to order as much as 10% to 20% more than they need and create an inventory safeguard. 

In 2022, for instance, Tier 1 suppliers and OEMs are expected to place enough orders to produce 120 million car units, whereas annual vehicle sales are forecasted at 83 million. Additionally, companies are placing more ad hoc orders, often at an unusually high average sales price. While this provides immediate relief, given the long production time for chips, it’s introducing additional uncertainty into the supply chain.

Industry-Wise Scenario 

Automotive 

Automobile production fell dramatically as a result of both the pandemic and the shortage of semiconductor chips. From 2019 to 2020, manufacturing output fell by more than 14 million units. Though production caught up in 2021, it still lags behind pre-pandemic levels by over 10 million units.

Consumer Electronics 

Computing devices, peripherals and smart devices have seen annual price increases. Chip shortage is also to blame for the increasing cost of smartphones and other smart devices. The shortage has had a significant effect on the two electronic manufacturing giants Samsung and LG. Their inability to procure chips has resulted in low stock, backorders and price increases for their televisions, home appliances, smartphones and other electronics. Companies such as Microsoft and Sony, too, have had trouble keeping up with demand (not just the seasonal spike that occurs around the holidays) for their new consoles and accessories.

LED and Lighting Fixtures 

The lighting supply chain is heavily dependent on international trade and therefore susceptible to macroeconomic shocks such as semiconductor shortage, tariffs and the COVID-19 pandemic. Shipping delays and component shortages — including semiconductors used in electronics, most notably LED drivers — have impacted the lighting industry. Several of the largest American producers of LED goods have announced price hikes of between 2% and 8% for LED lighting and 9% for LED drivers.  In a survey, 10% of U.S. construction workers reported that they had trouble obtaining necessary supplies.  

The Road to Recovery 

The only way to overcome the global chips shortage is by ramping up the production of semiconductor chips. Unfortunately, it takes more than three years to build a new fab (semiconductor fabrication plant) and ramp up production. 

Other factors that are lengthening production lead time is the resurgence of the pandemic in some regions and geopolitical disputes, which has negatively impacted the export of raw materials required to produce chips.

Ultimately, improving diplomatic ties, establishing a more resilient supply chain, optimizing inventory management, fortifying relationships with suppliers and enacting sensible economic and trade policies are all necessary for a long-term solution.