Global Chip Shortage Explained: Why It’s Happening, How Does It Impact You And More?

Your next smartphone could be more expensive than you hoped for, or it might arrive on the market later than expected. Here's why.

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No one knew how 2020 would go and what it would mean for the future, and there’s no better proof of that than the global chip shortage going on right now. Think about it, between February to July last year, electronics companies all over the world were saying they had products to sell but no buyers to sell to, or stores to sell at, thanks to the lockdowns. Less than a year after that they’re saying they have buyers who want products, but lack the raw materials required to build those products. Did that really happen? Let’s look at the reasons.

Pent-up demand

When the pandemic began, e-learning was a thing that happened in rich countries or tier one locations. Many didn’t even believe it to be a feasible means of education in the long run. Well, that changed.

When governments finally allowed businesses to reopen, people from all around the world rushed to buy new laptops, smartphones and other gadgets. You see where we’re going with this? All of these products need chips for various functions.

Increasing costs

If you drive to work every day, you probably keep a track of the rising petrol prices. The rise in cost of fuel has more than tripled the amount of money companies have to spend on ocean freight. In addition, there’s a shortage of containers going on globally, while the cost of raw materials like copper, aluminium and more have also increased. What does this all mean? You guessed it, shortage in all of these components, which in turn leads to a drop in production.

China recovered before everyone else

When the rest of the world was just starting to shut their borders, China was preparing to reopen its economy. Which means that when the demand for electronics was lowest worldwide, it was starting to rise in the largest market in the world. Government data from China shows that even in a pandemic-riddled year, the country saw 296 million smartphone shipments, a 20.4% drop from the 372 million shipped in 2019.

Again, see where we’re going with this? No, no problem.

You see, China started buying smartphones and other electronic products before others. Which means that the market required the next iteration faster as well. Companies had to meet this demand, which was now moving slightly ahead of other markets, while also making up for lost time in those other countries.

You wouldn’t believe how big Huawei is

Many wonder why the United States (US) is going after Huawei. After all, how can a single telecom company post such a great threat to a whole country, right? Well, that telecom company also happens to be Huawei, which is a giant in the literal sense. Huawei doesn’t just make telecom networks, it makes smartphones, laptops and owns a plethora of patents in almost every important tech-related field.

In fact, Huawei is so huge that when the US issued its sanctions, the company had to place an order that would keep it afloat for the time being. The US sanctions came into effect on September 30, 2020 and Huawei reportedly ordered two-years worth of chip orders before this, which also contributed to the global shortage.

Why should you care about this?

The processor on your smartphone is a chip, as is the memory, the storage and much more. Chips are needed for almost everything you do on your phone, laptop and other electronic gadgets nowadays. Foxconn’s chairman, Young Liu, said last week that the shortages will continue till mid-2022, which could have a significant impact.

When shortages of important components continue for too long, their suppliers hike prices of these components. It’s basic economics — supply and demand. As a result, the cost of producing phones, laptops etc. also go up, which manufacturers have to pass on to you, the consumer. So, if the chip shortage continues too long, it could lead to an increase in the price of the next smartphone you buy. At the very least, it’ll lead to delays in the launch of some of your favourite phones.

We’ve already seen this in televisions, where prices have increased by almost Rs. 5000, thanks to a shortage of open cell panels. The chip shortage is already playing a role in this too, meaning television prices could see even bigger price hikes.

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