Causes of the Global Semiconductor Shortage and its Impact

The world's reliance on semiconductors – the small chips that power everything from smartphones and cars to medical equipment – has been highlighted by an ongoing worldwide chip shortage.

The various reasons for this shortage have together created a perfect storm – disruptions arising from the pandemic, geopolitical tensions, high demand, numerous disasters, and supply-chain issues.

Let’s explore these in more detail.

The impact of the Covid-19 pandemic on chip manufacturing

Here is how the COVID-19 pandemic from 2020-2023 impacted the semiconductor market:

1. Automakers and other industries reduced orders for chips as a result of factories being shut down, reports Motor Trend.
2. Consumers, who were forced to remain at home, went on a tech spree, leading to increased demand for electronic devices (laptops, gaming consoles, etc.)
3. Semiconductor factories that had previously made chips for use in vehicles turned instead to designing chips for consumer electronics.
4. However, the car-making industry rebounded more quickly than anticipated, but in 2020, it emerged that the much-needed chips were no longer available.
5. In 2021, in Southeast Asia, COVID-19 prevention measures led to the lockdown of facilities where many chips were assembled and tested.

Geopolitical tensions: the trade war between the U.S. and China

The escalating trade frictions between the United States and China led to the inclusion of numerous Chinese companies on the U.S. Entity List (trade blacklist) and increasingly strict export controls on advanced semiconductors and key tech components, for example, China's limitations on the export of the rare earth minerals required for chips.

This forced many businesses in China, as well as worldwide, to start stockpiling vital chips and components, which in turn worsened the global semiconductor shortage and further strained an already fragile supply chain.

Increased demand for electronics and AI

The demand for semiconductors has climbed due to a number of factors, with the main reasons being:

1. A rise in the demand for electronics

Increasingly powerful smartphones, faster computers, larger data centers, IoT devices, 5G rollouts, electric vehicles, and automation have all led to an increase in demand for electronics and hence semiconductors.

2. A new AI demand wave

According to Reuters, due to the huge excitement around AI, companies are rushing to create massive AI systems, which require millions of chips, and factories simply cannot keep up, which creates shortages.

And since there are fewer chips available than are required, prices skyrocket, and numerous tech projects are delayed.

• Electronics shops in Japan are now starting to limit the number of hard disk drives customers can purchase while prices have doubled.
• Smartphone developers in China are warning of a possible 20-30% spike in prices.
• Microsoft, Google, and ByteDance are all competing for supplies of memory chips from companies such as Micron, Samsung Electronics, and SK Hynix.

Tech pricing issues and delays are likely to persist until 2027, according to chip executives.

Natural disasters and unforeseen events affect production

Various disasters have impacted semiconductor supply across the world, with some examples being:

• In 2021, automakers like Ford were severely impacted when a fire at Japan's Renesas Electronics, a major automotive chip plant, halted output, with 600 sq. m. being affected. It took months for operations to return to normal.
• The same year, a strong winter storm in Texas forced Austin's Samsung and NXP chip factories to close.
• Water is necessary for the production of chips, but Taiwan, where the world's largest chip manufacturer, TSMC, is located, suffered from a drought in 2021, which had a serious impact on the entire supply chain for semiconductors.
• In 2024, a 7.6-magnitude earthquake in Japan forced a semiconductor factory to halt its operations.

Industries most affected by the semiconductor crisis

Since chips can be found in numerous products, their shortage has an impact on a wide range of industries, but some sectors have faced more serious consequences of this than others. This is because they either rely on a high volume or require specific chips that are somewhat scarce.

Here, we examine three major industries that are experiencing difficulties and discover how they have continued to operate during the crisis.

1. The Automotive Sector: Challenges and Opportunities

Vehicles rely on microcontrollers for safety, engine management, and infotainment, which is why the semiconductor shortage hit this industry probably the hardest.

• Global auto output fell by more than 10 million vehicles in 2021 due to a shortage of chips, forcing manufacturers to shut down factories and suffer enormous financial losses.
• Up to 17 plants in North America and Europe stood inactive in early 2021.
• Customers had to face long delivery times for cars as well as limited availability.
• Carmakers lost US$210 billion in revenue in 2021.
• Worker furloughs and shutdowns led to increased car prices and inflation.

How did automakers respond?

• Emphasized high-margin models such as trucks and SUVs.
• Put the production of lower-profit cars on pause.
• Parked thousands of half-completed cars that needed to be equipped with chips.

In addition:

Some companies like BMW, Ford, and GM engaged in direct partnerships with chipmakers.

Other carmakers decided to work on their own chips, such as the alliance between Chrysler/Peugeot’s parent company, Stellantis, and Foxconn.

2. Consumer Electronics

The shortage in chips led to several issues in this sector, including:

• Scarcity of products such as PlayStation 5 and Xbox Series X.
• Drastic price increase of PC graphics cards.
• Delay in new smartphone launches.

In addition:

The knock-on effect for customers is an increase in the price of devices. According to Counterpoint Research, AI-driven demand caused the price of memory chips to increase by about 30% in late 2024, and another 20% rise is expected by early 2026.

AI servers such as Nvidia GPUs are now directly competing with smartphone manufacturers for the same memory chips, which is destabilizing the long-standing equilibrium of the supply chain.

3. Healthcare

Chips are essential for the operation of many vital medical devices, including blood pressure monitors, MRIs, and CT scanners.

One of the impacts of the chip shortage for this sector is:

• Producers of medical devices had difficulty obtaining enough of these components, raising concerns about the consequences for patient care.
• The COVID-19 pandemic exacerbated the issue as it increased the demand for respiratory devices.

In the United States, a group of medical associations has urged the government to give priority to medical devices in chip distribution.

With advances in healthcare, for instance, AI-powered diagnostic tools, telemedicine equipment, and wearable health monitors, in the near future, the sector will require more advanced chips.

Job Market Impact: Workforce adjustments in high-tech industries

The growth of the global semiconductor market, which was valued at US$697 billion in 2024 according to Deloitte's 2025 Outlook, has led to a talent crisis due to the dramatic increase in the demand for AI accelerators, electric vehicles, and data centers.

According to a Deloitte report:

• 55% of the U.S. semiconductor workforce is over 45 years of age, while in Europe this indicator stands at 20%.
• There will be a massive shortage of engineers if the semiconductor industry fails to become more attractive to employees. Today, the talent deficit totals over 200,000 in Asia-Pacific (not including China) and over 100,000 in the U.S. and Europe, according to McKinsey.

Government Initiatives: Investments and regulations to boost production

There is no doubt that for many governments today, semiconductor capacity is a national priority, which is why some have established initiatives and legislation to increase production and reinforce supply chains.

Semiconductor production in the United States

The best-known example is the U.S. CHIPS and Science Act, which was passed in 2022 and offers over US$24 billion in tax incentives for investments in chip plants in addition to US$52.7 billion in direct support for semiconductor manufacturing, research, and the training of workers.

Thanks to the CHIPS Act, the industry has witnessed large investments in new production factories from tech giants such as Intel, Samsung, and TSMC. The latter, for instance, has invested US$40 billion in Arizona.

Semiconductor production in Europe

Put into effect in September 2023, the European Chips Act seeks to boost the region's semiconductor industry by raising €43 billion in public and private investments by 2030.

The goal of the Act is to double the market share of European nations in the semiconductor industry from 10% to 20% by the end of the decade, mixing large projected contributions from Member States and private investments with a somewhat small direct budget outlay, according to the European Files.

However, this Act faces structural and financial issues that are slowing progress and placing the region behind the U.S. and East Asia. These include:

• Relying on funding from the Member States
• Slow approval processes
• Shortage of advanced manufacturing capabilities

Semiconductor production in Asia

• In South Korea, the Ministry of Economy and Finance intends to broaden tax incentives for investments in semiconductor infrastructure and private R&D. In addition, the government will also offer low-interest loans totaling 14 trillion won (US$10 billion) in 2025.
• The Japanese government has committed ¥1.05 trillion (US$7 billion) for next-gen chip and quantum computing projects and ¥471.4 billion (US$3 billion) for local advanced chip manufacturing, highlighting its goal to retain a competitive advantage in vital technologies.
• Leading companies in China's semiconductor sector witnessed a sharp increase in government subsidies in 2024 as Beijing intensified efforts to increase technical self-sufficiency amid escalating tensions with Washington.

Data on 25 of China’s best-known semiconductor companies showed that state backing for those companies amounted to 20.53 billion yuan (US$2.82 billion) last year, a 35% increase from 2022. However, this is only a portion of the total government support granted to the Chinese chip sector.

Final word

The semiconductor shortage, brought about by a range of factors, including the COVID-19 pandemic, geopolitics, and disasters, has had a serious impact on various industries, from automotives and consumer electronics to healthcare.

This scarcity serves as a reminder that an uninterrupted supply of chips is essential for our more digitized and networked modern society, and some governments have come to this conclusion and acted accordingly.