TORONTO -- For the past year, a pandemic induced shortage of semiconductor chips has rocked global supply chains, affecting the production of cars, game consoles, home appliances and more.
But while there are signs that production constraints for semiconductors are beginning to loosen, experts say it could take another year or more for the shortages to ease along the supply chain.
In the early months of the pandemic, chipmakers slowed production after auto manufacturers had slashed their orders for chips, anticipating a reduction in demand for the next several years. However, demand quickly resurged in late 2020, leading to an imbalance of supply and demand.
Given that chips require lots of water to produce, chip manufacturing also took a hit as a result of summer drought in Taiwan. The island is home to Taiwan Semiconductor Manufacturing Corporation (TSMC), the world's largest chip maker. A February winter storm in Texas, home to chipmaker Texas Instruments, also froze chip factories in the state.
The chip market has also had to contend with a fire at a chip factory in Japan, U.S. sanctions against a Chinese chipmaker and a fourth wave of COVID-19 that was especially catastrophic in Asia.
"Any one of those things wouldn't have been that big a deal. It's just that when we put them together, it's huge," said Will Mitchell, professor of strategic management at the University of Toronto's Rotman School of Management.
HIGHER PRICES, PRODUCTION STOPPAGES FOR AUTOS
That's led to inflated prices and shortages for all the products that require semiconductors. For cars, the shortage has led to production cuts and temporary shutdowns at automotive factories all over the world, including in Canada.
Chrysler announced in October that shifts would be cut at its plant in Windsor, Ont. General Motors' CAMI plant in Ingersoll, Ont., has seen several temporary shut downs for weeks at a time between February and September.
The shortage of new cars has also resulted in higher prices for used cars. AutoTrader.ca, an online used car marketplace, reported that the average price of a vehicle on their platform was $30,967 in October, up 22.8 per cent compared to the same time last year.
"Prices generally go down throughout the year. But this year, because of what's going on with the pandemic, inventory shortages, the increased demand on vehicles, we see the exact opposite trends," Baris Akyurek, AutoTrader.ca's director of marketing intelligence, told CTVNews.ca.
It's not just automobiles. Game consoles, such as the PlayStation 5, as well as PC graphics cards continue to remain sold out at retailers for long periods. Even appliance manufacturers are struggling to meet demand, leaving some consumers for their purchases to arrive.
'A SLOW RECOVERY'
But Scotiabank economist Rebekah Young says that there are signs that chip production is starting to rebound.
"If you look at semiconductor chip production in the U.S. where data is more readily available, (semiconductor production) certainly is recovering strongly," Young told CTVNews.ca. "But it's a slow recovery."
Akyurek agrees, and points out that Toyota, the world's largest automaker, announced in November plans to return to full production capacity.
"I've talked to quite a few dealerships. I've talked to (manufacturers), I've talked to automotive consultants," he said. "The 'consensus' in the market is that the worst of this inventory situation is almost over or over."
But even if production constraints alleviate, it might still be a while for prices to come back down.
"There are a lot of vehicles sitting on the sidelines of manufacturing sites that are all done, except for the chips that need to be inserted. So, there's still a lot of backlog in meeting past demand," Young said.
The Biden administration is allocating US$52 billion to boost chip production in the U.S. The European Union is also pledging US$160 billion for chip production, although similar commitments have not been made by the Canadian government.
Young says these measures are unlikely to do much to address this current shortage, given the amount of time it takes to set up production facilities. Mitchell says he'd rather see the U.S. government lift sanctions on Chinese chip maker Semiconductor Manufacturing International Corporation.
"There's a little bit of a role for governments, but that's more in facilitating trade and making sure that borders are open than anything else," he said.
Young believes the supply of cars and other final products that use chips will "start normalizing" by 2023. Mitchell, however, says in the likely best-case scenario, shortages could ease in the fall of 2022.
But in the worst-case scenario, the shortages could pile up and contribute to a recession.
"The other scenario is that this contributes to a recession, and we get a crash, and things come to a grinding halt. And then things sorted out because there's nothing moving, because they don't need for anything to move together," Mitchell said.
Mitchell says the world's economy is "100 per cent" guaranteed to have a recession at some point in the future. However, trying to predict when a recession might happen or the causes leading up to one is "close to impossible."
Chip industry leaders are divided on when the supply chain constraints could end. AMD CEO Lisa Su said in September said she expects the shortage to ease in the second half of 2022.
Meanwhile, the CEOs of Intel, Nvidia and TSMC expect the chip shortage to continue until 2023. IBM CEO Arvind Krishna offers the most pessimistic forecast, saying the shortages could last well into 2024.
Even if these supply issues become resolved, experts say that car prices for consumers may be permanently inflated.
"It's easier for prices to go up than it is for them to come down. So, there will be some stickiness. I would actually expect them to come down, probably gradually and maybe not all the way," Mitchell said.
Young believes automakers and other manufacturers could rely less on "just in time" deliveries for their chips going forward and instead keep more inventory on hand.
"Keeping more inventory, that does have a cost. Those sorts of pressures would mean more long-term impacts on pricing of the product," Young said.
