By Andre Sousa, Product Marketing Manager for SIMs & EMV cards at Valid.

12/13/2021

Understanding the global chip shortage and how to reduce its impact to your business

As technology has advanced, semiconductor chips (an electric circuit with many components such as transistors and wiring formed on a semiconductor wafer, which is a physical unit used for manufacturing semiconductor devices) have expanded from computers and cars to toothbrushes and clothes dryers. They are the unsung heroes of the new technological world, working behind the scenes to power almost everything. In recent years, they have empowered breakthrough technologies, including artificial intelligence and machine learning, transforming how we live and work. However, to take the digital revolution to the next level, it will require even more advanced and innovative chips with greater computing power and memory capacity.

There are two types of definitions when we talk about the semiconductor chip production environment, and it is important to differentiate them – the “silicon design” and “silicon foundry”. The silicon design is a worldwide activity that manages the creation of new features in the “systems on a chip” and focus on broader segments of the market. The “silicon foundry”, however, is focused on geographical areas and it requires more capital investments. In past eight years, the silicon foundry investments have dramatically increased in Taiwan and China, for example.

Chips are now a crucial component in many strategic technologies – from defense systems to cybersecurity and renewable energy – that their manufacture has become a major geopolitical issue. Policymakers are now saying that “chips are the new oil”. They were invented in the U.S., and much of the cutting-edge design still takes place there, but around 80% of production is now based in Asia (mostly in Taiwan, South Korea and China) due to cost efficiency.

Due to the global semiconductor shortage, one of the many problems caused by the covid-19 pandemic, all companies at some level of business are experiencing effects of this scarcity, especially around certain sets of smart products and production. Governments around the globe are worried about this issue since the severity of the global chip shortage has increased in recent months, impacting millions of people.

Below we explain why the chip shortage is happening, which segments are most affected by it and how you can reduce the impact for your customers, based on Valid’s experience.

  • What is causing the microchip shortage?

As the world shut down due to the covid-19 pandemic, many factories shut down with it, making the manufacturing of chips impossible for months. The increased demand for consumer electronics also caused significant shifts that rippled up the supply chain.

  • Which market segments are most affected?

If we look at successive technology nodes, we see that new investments are generally made in the most advanced areas of the mobile industry, for the benefit of the computer and consumer devices industries, while older plants are recycled for the automotive component industry and other small modules such as smartcards.

Currently, the needs of these more innovative segments are exceeding existing capacity and it is difficult to justify investments in older technology nodes. Therefore, the smartcard segments, including Telecom (SIM cards), are taking a big hit within the supply chain ecosystem.

There are billions of SIM cards in circulation around the world, so any reduction in the market’s ability to deliver these cards will have a significant impact on people’s lives, especially in markets that are not operating in a fully digital way, or make the usage of embedded and integrated secure devices instead of the traditional SIM card.

  • How long will the shortage last?

There is no end in sight. According to different market sources, some companies estimate that it may take from one to two years before production is able to return to normal.

It is clear that the global chip shortage shows no signs of diminishing anytime soon. So, for now, the chip industry will continue to be hampered by the consequences of the covid-19 pandemic, as products are shipped with missing features and higher prices — often after long delays.

Discussions with key channels about supply plans, so that chip suppliers can assign components to products that have the greatest urgency or priority in terms of supply, have taken place. Opinions on when the shortage will end vary. The CEO of chipmaker STMicroeletronics estimated that the shortage will end by early 2023. The CEO of automaker Stellantis said that the shortage “is going to drag into ’22, easy.” while Intel CEO, Patrick Gelsinger, believes that the shortage could last two more years.

On that basis, the shortage will likely continue through 2023 and beyond in certain markets since supplying chips to the most valuable markets will take priority over other “less profitable” or non-urgent markets.

As one of the top 5 SIM card providers in the world, Valid also faces some challenges related to the chip shortage in order to serve our clients within the Telecom market.

Based on our global position and relevance in these markets, Valid has created an action plan to address this situation and is in constant negotiation, mainly with Telecom silicon suppliers, in order to minimize delays from the shortage, including contingency plans or migration from one chip to another.

Valid estimates the entire year of 2022 will also be impacted by this shortage and that a return to normalcy will be feasible in 2023. A close approach and business plans that are very well aligned with your customers is crucial to achieving success during the shortage.

Based on Valid’s good position within the market, the company has been able to minimize the issue in order to secure the supply of SIM for our clients. When specific issues have arisen, especially when it comes to chip volumes, a revised delivery plan is established for the coming months.

How to keep on investing in new projects and businesses while living through a chip shortage?

Valid is also working on new digital areas in order to provide its expertise and technology to serve the OEM, Automotive, IoT and M2M related markets. For example, the automotive sector relies on chips for everything, from computer management of engines to driver assistance systems, and it is the hardest hit. Companies such as Ford, Volkswagen, Jaguar, and Land Rover have shut down factories, laid off workers and slashed vehicle production.

The semiconductor shortage will cost the auto industry $210 billion in lost revenue, according to consulting firm AlixPartners.

“The auto industry is a relatively small chip end-user, but it’s growing fast.”

Beyond the traditional businesses related to SIM cards, Valid also offers solutions for embedded secure elements, a segment that tends to continuously grow and need investments. Valid’s R&D, Technical and Sales teams are working hard to keep investing time and effort into building an efficient ecosystem that can be well adapted, when necessary, which is especially relevant during the chip shortage. It is important to keep exploring the digital world, the secure cloud, and its advantages, while working on creative ideas to manage external factors pertaining to this unprecedented global event.