How Will China’s Covid-19 Lockdowns and the War in Ukraine Affect the Global Chip Shortage?

 August 17th, 2022 |   By Area51 Electronics |   0 Comments
electronic chip with the words Chip Crunch across it

The Covid-19 pandemic brought plenty of firsts. One of those firsts was the long shortages. Coffee, masks, hand sanitizer, and, of course, toilet paper all suffered from shortages. It’s no surprise that after two years of global supply chain crises, most people are weary of the word “shortage.”

The electronic component shortage, specifically that of semiconductors, is one of the longest-lasting shortages born from the Covid-19 pandemic. The pandemic was not the sole reason behind the shortage, but it was a catalyst. To combat pandemic lockdowns, work from home models rose, increasing the demand for computers and other appliances that rely on semiconductors to function. But semiconductor fabrication plants, all based in one geopolitical area, couldn’t meet these rising demands under Covid-19 lockdowns.

What Started the Shortage?

The lockdowns in China during 2020 started the shortage. The initial shock to the global supply chain from China’s aggressive response to contain Covid-19 was expected to resolve in early 2021. That did not happen.

Recovery to the global supply chain hit one obstacle after another as component manufacturers struggled to pick up increasing backlogs. Fires, winter storms, geopolitical tension, and further lockdowns complicated the return to normal. Even in the face of unfavorable odds, semiconductor manufacturers worked exceptionally hard throughout 2020-2021 to balance a vulnerable global supply chain.

At the start of 2022, experts including Pat Gelsinger, Intel’s CEO, said that they expected stabilization in early 2023. That was before China experienced an outbreak of a new Covid-19 sub-strain of the Omicron variant, Omicron BA.2, or stealth Omicron. Or, for that matter, before Russia invaded Ukraine.

War in Ukraine – Humanitarian Loss and Threat to Recovery

Without a doubt, the loss of life and casualties that have occurred because of the war in Ukraine has been catastrophic. Before discussing the economic impacts war has and may contribute, it is important to acknowledge the damage done to human life.

Ukraine and Russia are two countries that do not come to mind when semiconductor manufacturing is said. China, Taiwan, Japan, South Korea, and the United States are leaders in semiconductor manufacturing with Taiwan leading the charge. Ukraine does contribute 45%-54% of semiconductor-grade neon used in the lasers that manufacture complete semiconductors.

Two Ukrainian companies, Ingas and Cryoin, provide this neon, according to Reuters. In CNBC’s article about Ukraine’s neon supply, the article states, “global neon consumption for chip production reached 540 metric tons in 2021.” That is a massive demand for a product that has suddenly been cut in half.

Angelo Zino, an analyst at the Center for Financial Research and Analysis (CFRA Research), told CNBC,

“If stockpiles are depleted by April and chipmakers do not have orders locked up in other regions of the world, it means further constraints for the broader supply chain and inability to manufacture the end-product for many key customers.”

China is another manufacturer of this semiconductor-grade gas, but prices are steadily rising. Larissa Bondarenko, business development director of Cryoin told CNBC that prices of neon gas have already risen 500% since December under pandemic pressure. In 2014, neon prices rose 600% in response to Russia’s annexation of the Crimean Peninsula.

Gartner analyst, Alan Priestley, informed CNBC that major chip manufacturers, Intel among them, “have several months of neon in reserve.” Priestley said, “chip manufacturers are working with their supply chains to try to minimize the impacts.” The fabs more likely to suffer the effects of Russia’s invasion of Ukraine are smaller and with limited supplies.

Priestley later said, based on the Crimean Peninsula annexation in 2014, chip manufacturers have taken considerable steps to avoid a neon shortage. This may mean the semiconductor shortage may not be affected as much as it could have been years ago.

Suppliers Learning from Old Lessons

The invasion of Ukraine is far different from the annexation of Crimea in 2014. After the steep price increase of neon gas in 2014, many companies looked to diversify their supply chains. Semiconductor manufacturers have stockpiled critical raw materials to provide a buffer and prolong stability.

The U.S. semiconductor manufacturers will take the initial brunt should these stockpiles run out, according to the Wall Street Journal. The U.S. purchases most neon from Ukraine. Though options are not limited to China as a backup for neon production should supply run out.

Gaurav Gupta, the VP analyst at Gartner, said “most chip manufacturers have contingency plans.” The potential impacts of Russia’s invasion could lead to panic-buying and further disruption that could affect semiconductors.

It is important to note that Mr. Gupta, John Neuffer the CEO of the Semiconductor Industry Association, and ASML Holding N.V. a Dutch supplier of semiconductors, agree that there will be no immediate impact on semiconductor supply or prices.

An impact on the semiconductor industry will only be known if stockpiles run out. Even then, Brady Wang, the associate director of semiconductors at Counterpoint Research, said the risk here is between the time it takes for new neon gas factories to come online and stockpiles to run out. Only time will tell.

Time may not be on the industry’s side. As one crisis is averted, another one appears.

A New Sub-Variant of Covid-19 Causes Massive Lockdowns in China

Its name is Omicron BA.2, a sub-variant of Covid-19 Omicron. It is also known as stealth Omicron. It is 30-50% more contagious than Omicron BA.1, the variant that appeared in South Africa last November, and accounts for 72% of Covid-19 variants in the U.S.

Dr. Scott Gottlieb, former FDA commissioner and now a board member of Pfizer doubts the U.S. will see a national wave of infection like previous variants, due to increased vaccinations and at-home testing.

China is handling the rise in stealth Omicron cases with extreme prejudice. The problem is the policy, known as the Zero-Covid strategy, is proving to be less effective in the face of more transmissible Covid-19 variants. While other countries have left extreme lockdowns in the past, China continues to shut down cities with populations in the millions.

One of these cities is Shenzhen, a key area for tech giants such as Apple iPhone assembler Foxconn, Oppo, and Huawei. Covid-19 cases have been reported in more than half of China’s 31 provinces. Shutting down these industrial hubs can wreak havoc on China’s economy and the global supply chain at large.

Despite the risks, China’s government will continue to implement its zero-Covid strategy. They have found a way to keep semiconductor manufacturing on-going through the lockdown. Workers in Shanghai at Taiwan Semiconductor Manufacturing Company (TSMC), Advanced Semiconductor Engineering (ASE), and Wafer Works in the area have been locked in. TSMC, ASE, and Wafer Works told Taiwan’s Liberty Times in a recent report they are providing food and lodgings on-site.

Many employees, AP News reported, have packed essentials for camping out at work for a few days. It is unclear how long that will last or, for that matter, how long the lockdown will continue.

If Shanghai does decide to do a full lockdown, the exact degree of disruption this may place on the global supply chain is unclear. The last time Shanghai did a lockdown of this degree was in early 2020 and the world is still recovering from that shock.

What Can You Do to Prepare in Uncertainty

The future of 2022 and the semiconductor shortage is a little less clear than it was in January, that is for sure. The difference between the start of February and the end of March is an extreme example of how much things change in an instant. What can you do to navigate these future disruptions and prepare for the worst if it is not clear whether it will come?

The best thing you can do is keep an eye on the market and the news. Even better? Finding an electronic components distributor with experts that have experience in forecast management to help you make an informed decision. Area51 Electronics can keep an eye on the market to help you make the best choice in the face of disruption.

As an independent and authorized electronic components distributor, Area51 Electronics can help manage your inventory should long-term storage be necessary to prepare for disruption. Area51 Electronics can help you plan and execute the steps needed to come out of this uncertain time stronger and better.

The catch? None. All you must do is initiate first contact.

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