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The Global Semiconductor Shortage and How it Affects the World Economy

Fluctuations in demand during the pandemic created a perfect storm for the semiconductor industry, resulting in the chip’s current shortage and the logistics industry turmoil.

Origins of the Shortage

At the beginning of the pandemic, car sales plummeted, leading automakers to plan for a long-term demand slump. Logically, they canceled their orders for the semiconductor chips that form a crucial component of automobiles, and manufacturers responded by shifting the supply to other industries such as tech and home appliances that were experiencing a boom from workers shifting to at-home workplaces.

The only problem: car sales didn’t stay slumped for long. They quickly picked back up in late 2020, but the auto industry’s canceled orders left it with few options for getting the chips needed to meet demand.

Economic Consequences

The scarcity of semiconductor chips relative to demand has created a domino effect in the global economy. The chips are not only crucial for many consumer products but also play a vital role in the machinery used for manufacturing. Industrial output in places like China and Japan significantly declined in early 2021 due to a lack of chips for both the equipment running factories and for the products they manufacture.

Now, tech, auto, and home appliance companies are all likely to have huge losses, raise prices, and cut production to cope with the semiconductor shortage. However, auto companies, in particular, are experiencing great difficulties coping, as each car can require thousands of chips.

Effects on the Shipping Industry

Although the auto industry is struggling to meet demand, its roll-on/roll-off (ro/ro) cargo volumes have reached unprecedented highs in 2021. One explanation may be spillover from container shippers using the extra ro/ro capacity to make up for the congestion and equipment shortages they are experiencing in their regular cargo chains. Some ro/ro carriers are taking full advantage of these spillover opportunities, even launching new connections and reactivating ships that had been laid away after the early 2020 volume slumps.

Despite the overall high ro/ro volumes, the semiconductor shortage is causing unpredictable fluctuations in volume with little visibility for future supply or demand. Additionally, the shift of chip production to primarily offshore locations in China, South Korea, and Taiwan in the past decade or so has only exposed further risks in the global supply chain. The plant shutdowns, port closures, and massive blockages in these areas of the world during the pandemic have resulted in inefficiencies and increased costs across the logistics industry.

An End in Sight?

Increasing semiconductor production is a slow process as it requires specific tools and a long production timeline of about 26 weeks. The current complications in the global supply chain are only adding to these already long lead times for the chips, dragging out the recovery and making it difficult to estimate when relief will finally arrive. Although analysts predict that the current peak will ease in the third and fourth quarters of 2021, they warn that the overall supply will likely not return to pre-pandemic levels until 2022.

While we wait to see what the future holds for the global supply chain, ClearFreight stands ready to help our customers face whatever 2021 has left to throw. Our logistics experts not only offer our customers valuable advice but customized solutions to fit their supply chain needs. Contact us today to hear how ClearFreight can make logistics easier for you.

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