From soaring prices in automobiles to computers to household appliances, the “chip shortage” is becoming an all-too familiar, and all-too annoying, term that consumers are having to cope with. In fact, a Goldman Sachs analysis suggests that such a shortage has impacted 169 total industries, as Yahoo! Finance’s Daniel Howley explains, “We’re talking everything from steel product and ready-mix concrete manufacturing to industries that build air conditioning systems and refrigerators and breweries.” In other words, in an increasingly digitizing world where computers are comprising larger portions of supply chains, it may be difficult to imagine what industries wouldn’t be affected by rising chip prices. “Chips” particularly refer to integrated circuits, a microscopic collection of electronic circuits attached to semiconductor material. Technology writer Rahul Awati describes integrated circuits as “the fundamental building block of all modern electronic devices,” given that they can “function as an amplifier, oscillator, timer, counter, logic gate, computer memory, microcontroller, or microprocessor.”
Behind this shortage in a crucial capital good is what many describe as a “perfect storm” that started with the COVID-19 pandemic. Pandemic-era government lockdowns forcibly dislocated complex supply chains that involved computer chips while accelerating their demand as consumers, now working at home, began purchasing more electronic devices. Global demand for PC’s, for example, grew by 13 % alone in 2020, and PC market revenue grew by over 17 % in the same year in spite of the severe recession in the process. Other factors, too, are thought to have heightened chip scarcity as well over the last few years; in the midst of the pandemic, legislation as part of the US-China trade war saw the US Department of Commerce impose restrictions on the Semiconductor Manufacturing International Corporation, China’s largest chip manufacturer. Meanwhile, in 2021 an unprecedented drought in Taiwan, the world’s largest semiconductor producer, heavily crippled its chip industry which relies on dozens of thousands of tons of water per day to clean its factories and chip “wafer” components which fabricate the integrated circuit.
As a result of these crushing supply shocks alongside an artificial spike in demand, the producer price index for semiconductors and their components have risen over 10 % since February 2020. While this may not seem too drastic, chip prices had previously declined by over 25 % since 2010: a downward trend that hundreds of industries likely had anticipated to further continue. Over the last few months, however, there’s even more to suggest that semiconductor prices are only destined to further spike.
The rapid development of AI technology as of late, and the growing scramble to develop new AI systems, has unleashed an equally massive scramble for advanced chips such as graphics processing units (GPU’s) and field-programmable gate arrays (FPGA’s) that such technology is heavily reliant upon. Deepa Seetharaman and Tom Dotan with The Wall Street Journal report that, “Access to tens of thousands of advanced graphics chips is crucial for companies training large AI models that can generate original text and analysis. Without them, work on the large language models that are behind the AI runs much slower, founders say.” Among these AI models that can create “original text and analysis” includes ChatGPT, a product of AI research lab OpenAI. Seetharaman and Dotan find that combined supply and demand shocks have “restricted the processing power that cloud-service providers like Amazon.com and Microsoft can offer to clients such as OpenAI.”
As a light at the end of the tunnel for rising chip prices waits to be seen, some respite can nonetheless be drawn from the growing ordeal. On the one hand, as supply chain issues slowly but surely fade, some upward pressure on such prices may be lifted. The more semiconductor prices reflect demand growth, the less problematic they may, in turn, be viewed. There’s often the tendency to view rises in the prices for capital goods to always be inherently problematic, even though such rises may often reflect growing, income effect-driven demand. The rapid and recent development of AI technology has undoubtedly brought with it miraculous innovations that may not have been even conceived as possible just a few months ago. The corresponding economic benefits of this technology may be waiting for the world on the other side of a nasty chip shortage.