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The semiconductor chip shortage- how it impacts the global economy

The world has gone digital, anything which was done earlier with the help of a huge labour force can now be done very easily through advanced technologies and machines. It has been very beneficial for global growth and has saved time, effort and money. The world has transformed from relying on the labour force to using hi-tech electronic machines and devices to make their work far easier. Apart from hi-tech machines, electronic devices are used by any individual on a daily basis. We use electronics for almost everything. We are not realising but we have become completely dependent on it, which is quite harmful to us.

How electronic-led world is beneficial? 

There are many reasons why this electronic-led world is beneficial. To start, it should be considered that is very cost-effective and helps businesses reduce their expenses. It helps in the easy transfer of information around the globe, facilitating the growth of the global economy. It also provides long term access to the storage of data which can be easily accessed anytime. However, we all know that with every good thing, there come some disadvantages. One such disadvantage of this is our rising dependency on it. We are so addicted to using electronics in our daily activities that it has now become a problem.

What’s happening in the world? 

Any electronic device requires an electronic chip to function, and there recently is a global shortage of these electronic chips which has caused massive distress as businesses and companies are not able to keep up with the rising global demands of various electronic goods and components. In this article, we will learn about the reasons behind this global shortage as well as the impact this problem has on the world.

An electronic chip costs just a few dollars but these few dollars have cost millions of losses to the major companies across the world. An electronic chip is a necessity for any electronic item and its shortage has hampered the production of electronics which has led to a reduction in its supply as compared to the rising demand. The chip is used in several electronic goods, vehicles and smartphones.

The shortage started soon after the COVID-19 virus led pandemic broke out in the world. The trade was completely hampered by the pandemic as the economies were shut. However, even after the opening up of the world, the shortage of these chips is on the rise. In the last few months, the global chip supply crunch has intensified and therefore leading to rising tension among businesses.

chip

According to reports, the global shortage of these chips has impacted at least 169 big industries around the globe. The major issue is that the expected shortage is said to rise till 2022 and nothing can be done before that. With no solution visible till 2022, companies around the globe are facing a major hurdle in their functioning. The rising shortage has started to impact major economies like the United States. You might be thinking how these chips are so important that they are directly affecting the economies? Well, we have an answer for that.

With technological advancement around the globe, these chips have become the heart of electronic items, ranging from small electronic items such as smartphones and tablets to big life saving pharmaceutical devices, agriculture technology and ATMs. These chips are required to facilitate key functions such as high-end computing, data control, storage, wireless connectivity and much more.

The rising Artificial Intelligence, quantum technologies, blockchain applications and many more hi-tech applications have led to the rise in demand for these chips. To conclude, these inexpensive chips play a very crucial role in the production of almost every electronic item. In layman language, we can say that these chips are the building blocks of hi-tech electronic items.

What led to the shortage of these chips? 

The shortage first started to begin after the virus started to spread across the world and destroyed the economies of the countries in 2020, due to the prolonged lockdowns and the restrictions imposed. However, during the initial stages, the shortage was not felt as the demand for all the products fell. As soon as the economy started to recover and the aggregate demand started to rise, the shortage of these chips was felt.

The major reasons behind the shortage of electronic chips in the world were the shortage of supply due to the pandemic, sudden rise in the demand for electronic goods after the opening up of the economy and the rise in the number of people working from home. While the demand for electronic goods across the world catapulted, companies have failed to fulfil the rising demands due to the chip shortage. According to the official reports, it is said that the shortage is said to rise till 2022, and may last for as long as 18 months, majorly due to the disruptions in the production process.

Globally, the US leads the R&D process of the electronic chips while the packaging, assembling and testing of these chips. It is said that countries have to boost up their production levels as well as investment levels in the production of these chips in order to reduce their dependence on other countries.

Affects of the shortage

The shortage of these chips have directly impacted the working of many bug industries and the risk is said to rise due to the prevailing shortage. The vehicle industry is reported to be the worst-hit industry by this shortage with major car manufacturers like Ford, Volkswagen, Renault and many more are feeling the heat of this shortage. These chips are used widely during the manufacturing of these vehicles such as in speedometers, infotainment systems and engines which has led to the loss of billions and this level is said to rise more. Most companies have said that the loss due to the shortage can last till at least 2022.

Other than the automobile industry, the manufacturers of consumer goods and smartphones have also been affected by the falling supply of these electronic chips. The actual problem is more than what it appears with a lot more industries getting affected by the shortage of electronic chips.

What about the individual consumer

The consumers have been affected as much as the industries as with the shortage of supply, the price of everyday electronic commodities have risen by many levels. The shortage of these chips has forced the car making industries to increase their prices. The hiked prices are a direct result of the shortage of these electronic chips.

It is said that the price of these electronic goods can rise by 1 to 3 per cent as the global chip crisis is far from over. However, many chip making industries have claimed to ramp up their investments to reduce this shortage, but it should be kept in our mind that the new chip producing plants would take at least two to three years.

Edited by Aishwarya Ingle 

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Simerleen Kaur

Talk to me about economics, trade, and all things India.

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