The Russian invasion is making the global chip shortage situation worse

Syllabus: General Studies Paper 3

Context

• A worsening of the worldwide chip scarcity situation is being caused by the ongoing war between Russia and Ukraine.
• Previously, it had been expected that the chip scarcity would last until at least the year 2023.
• The forecast was based on the pandemic’s impact on a component that has become critical to the operation of the vast majority of the electronic devices we use on a daily basis.
• It is expected that the global semiconductor market will grow by 8.8 percent to USD 601 billion in 2017, driven by double-digit growth in the sensors and logic category; in addition, with the recent trends in electric mobility, automotive safety, and the Internet of Things (IoT), the demand for semiconductors will only increase going forward.

What caused the Shortage Crisis to erupt?

• Increased sales of laptop computers as a result of lockdowns reached levels not seen in a decade.
• As office work migrated out of the office, home networking equipment, cameras, and monitors were in high demand, and laptops were in high demand for a short period of time while schools were out.
• As a result of the mandatory stay-at-home laws, numerous people have turned to console gaming.
• These devices, which are in great demand, are based on a thumbnail-sized semiconductor piece (or parts at times), and may execute a variety of operations on a single device. Manufacturers create them on 200mm or 300mm wafers, depending on the application. These are then further divided into little pieces.
• While bigger diameter wafers are more expensive and are mostly utilised for high-end equipment, the gadgets that were in high demand required smaller diameter wafers to be manufactured.
• However, even before to the outbreak of the pandemic, the industrial equipment necessary to produce them was in limited supply. The reason for this was that the industry was going in the direction of 5G, which required the pricey silicon wafers.
• Chip manufacturers were suffocated by high customer demand for low-end items, along with massive orders from technology companies, which forced their plants to close as well during the lockdowns.
• As the industry attempted to progressively pull itself out of the supply constraint, logistical complexity added to the difficulty of the endeavour.
• After then, the expense of transporting containers around the world drove up the price of a critical component used in the majority of electronic products and autos worldwide.

What is the cause of the Russian invasion’s impact on the chip shortage?

• Ukraine provides rare gases required in the production of semiconductor fab lasers, while Russia sells rare metals such as palladium, which are utilised in the production of semiconductors.
• In order to design chipsets that can power a wide range of devices ranging from autos to smartphones, this combination is essential.
• Palladium is produced in huge quantities in Russia and South Africa, which are the two main producers. Russia is expected to supply 2.35 million ounces (66 million grammes) of palladium in 2021.
• If those supplies were not available, the silvery-white market would experience a severe shortage, causing the price to rise.
• In addition to producing platinum and rhodium, Russia is also a major producer of the other platinum group metals, which might be swapped for palladium.
• As Russia’s invasion of Ukraine progresses, the nation is being targeted by Western sanctions, which might cause a disruption in the country’s exports, leaving semiconductor companies with less alternatives for sourcing raw materials to manufacture chip sets in the near future.

What steps are being taken by businesses and governments to adapt to these shifts?

• Businesses are reversing their intentions to outsource their operations. They are looking at the possibility of reshoring as a means of protecting themselves from global supply chain interruptions.
• Reshoring, also known as onshoring, is the polar opposite of offshore and entails bringing back the production and manufacture of items to the nation in which the firm was founded, rather than to a foreign location.
• A total of USD20 billion would be invested in two new chip production facilities in the state of Ohio, Intel said in February 2022. (US). The corporation intends to invest USD100 billion over the next decade and to construct eight more fab plants in the state during that time.
• Intel is one of the few firms that both designs and manufactures its own chipsets, making it unique in the industry.
• The opposite end of the spectrum is government assistance in creating an environment that is favourable to the establishment of facilities for the construction of semiconductor plants.
• The United States government is attempting to approve the CHIPS Act, which would provide semiconductor companies with USD52 billion in subsidies in order to expand chip manufacturing in the United States.

The Hindu link

https://www.thehindu.com/news/international/the-russian-invasion-is-making-the-global-chip-shortage-situation-worse/article65183693.ece

Question- How Russia Ukraine crisis has worsened the global chip shortage situation? Explain.