A global microchip shortage, generated by ongoing supply chain disruptions caused by the Covid-19 pandemic and a surge in demand as consumers spend more time living and working at home, has caused the price of consumer goods to soar over the festive period.

In addition, the release of a number of new electronic products has been delayed, harming companies’ profits, and leading many players to undertake the expansion of their manufacturing capacity.

Microchips are a set of electronic circuits on a small piece of flat silicon, which hold vast amounts of information and are responsible for carrying out mathematical or logical operations. Microchips are used in almost virtually every electronic product today, ranging from smartphones, to games consoles, cars, and even medical equipment, indicating their widespread importance and application.

The global semiconductor market (of which microchips are a major component) has expanded significantly in recent years, growing at a compound annual growth rate (CAGR) of 5.4% between 2016 and 2020 to reach a value of $440.6bn, according to MarketLine figures.

This has been largely driven by strong demand for new technology, such as the latest smartphones and games consoles, as global tech giants strive to out-compete one another with the most innovative and advanced designs.

Gaming console producers are highly vulnerable to microchip disruption

The gaming consoles market in particular has been adversely affected by the lack of availability of semiconductor chips. The global market grew strongly in 2021, with the launch of Microsoft Xbox Series X and Sony’s PS5, fueling a 93.7% value increase as sales surged in the final quarter of the year.

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However, with strong demand for such products persisting throughout 2021 as consumers continue to spend more time at home as new coronavirus variants threaten post-pandemic recovery, major console producers have been affected. For instance, Sony has reported that it will likely struggle to hit its PS5 sales target for the year due to microchip supply chain issues, constraining the company’s financial success.

Price increases resulting from shortages are also likely be passed onto consumers, with the Microsoft Xbox Series X experiencing nearly a 50% cost hike on some retail sites. The race to ramp up manufacturing capacity is therefore vital to minimizing disruption to businesses and consumers alike.

Market growth has been threatened by the Covid-19 pandemic

The Covid-19 pandemic has created long-term challenges for the market. The majority of microchips are produced in the Asia-Pacific region, with Taiwan Semiconductor Manufacturing Company (TSMC) being a major global competitor. As a result, nationwide lockdown measures and international border restrictions have disrupted global supply chains, hindering the import and export of microchip products.

At the same time, demand for chips powering gaming devices, laptops, and internet infrastructure has soared throughout 2020 and into 2021, rapidly outpacing supply. Tensions in global trade relationships, such as uncertainty caused by Brexit and US government restrictions on China’s largest semiconductor manufacturer, have further compounded these issues.

The consequences of this shortage have been far-reaching, causing a significant rise in the price of critical components and fueling rising inflation around the world. For example, in Q2 of 2021, Samsung’s smartphone sales decreased by 22% Q-o-Q due to component supply shortage and Covid-19 disruptions, while electrical goods retailer AO World has reported losses of GBP10m ($12.8m) between April and September 2021 due to a limited supply of electrical goods.