While the pandemic toilet-paper shortage may be memorable, the chip famine that started late last year is a shortage with more far-reaching consequences. Goldman Sachs estimates that the shortage has affected 169 industries, from steel production to soap manufacturing. It’s taken a bite out of manufacturers’ revenue, sent prices soaring, and is predicted to reduce U.S. GDP by as much as 1 percent.
No industry has felt the blow of the semiconductor shortage harder than the automotive industry. The shortfall is predicted to cost automakers $110 billion this year and reduce the number of vehicles manufactured by 1.28 million.
Most new cars that hit dealer lots these days are already sold, which means consumers must wait to get their hands on a new vehicle or pay up for a used one. (Used-car prices were up 27 percent since last year, which means the average vehicle transaction cost consumers $4,468 more.) The shortage is even affecting car-rental companies, who are struggling to meet travelers’ demands as they embark on long-awaited post-COVID vacations.
The chip shortage has also caused production delays on hot new gadgets. Earlier this year, gamers were so desperate to get their hands on the latest PlayStation console that eBay (News - Alert) scalpers were making thousands reselling PS5s online. Those production shortfalls will probably get worse before they get better.
Meanwhile, home-appliance manufacturers are dealing with production bottlenecks due to a shortage of microcontrollers. This, plus an increased demand led by the pandemic home-remodel boom, has been the one-two punch that’s made it difficult for homeowners to upgrade their kitchen appliances.
Lawmakers and manufacturers are scrambling for solutions
The chip shortage is so dire that President Biden issued an executive order to review U.S. supply chains. He’s proposed $50 billion for semiconductor research and production, but it may be too little, too late. According to Intel (News - Alert), the chip shortage could drag on for years.
To compensate, manufacturers are making trade-offs that have raised some eyebrows. Nissan is nixing the navigation systems in some models, and Dodge has pulled a smart rearview mirror that monitors the Ram 1500’s blind spots. This is a 180-degree shift in an industry that has been pushing toward smarter, less driver-reliant vehicles for years.
While the ramifications of removing key safety features have yet to be felt, I believe there are smarter solutions to combating the chip shortage. Today’s consumers crave innovation — and instant gratification. They don’t want to go back to using their smartphone for navigation because their brand-new car doesn’t come equipped with that feature. They also don’t want to wait weeks or months for their car or stove to come off the assembly line.
In my experience, consumers are more than willing to try something new from a company if they feel that it’s in some way better. Companies can start focusing on solutions that allow them to leapfrog hardware-imposed limitations, and they must be strategic in their manufacturing.
Here are just a few survival tactics manufacturers should be using:
1. Turn to cloud-based solutions
Last year during lockdown, families came to rely on their home Wi-Fi network like never before. They upgraded devices or added new ones and increased their wireless usage due to work, school, and entertainment. This increased demand placed an even greater strain on device manufacturers, and in the age of a fully connected home, a long-lasting chip famine could spell disaster.
For Communications Service Providers, I would argue that the key to weathering the chip shortage lies with software, not hardware. OpenSync is an open-source software initiative that is cloud-, device-, and silicon-agnostic. It’s also scalable and designed to support a broad range of services that only require cloud software changes.
I’ve seen companies like smart home solutions provider Plume rely on OpenSync during the famine to ensure that a variety of Wi-Fi-enabled devices, services, and wireless access points can play nice on a single home network.
Cloud-based solutions give developers the freedom to push software to older devices and device manufacturers more options on the chipsets they use. Since nobody knows when the semiconductor pinch will end, this freedom and flexibility is everything.
2. Dedicate more resources to diversifying supply chains
The semiconductor shortage highlighted U.S. supply-chain vulnerabilities so extreme that they have been characterized as a national-security crisis. One of the details I find most alarming is that the U.S. share of chip fabrication has slid from 37 percent in the 1990s to just 12 percent in 2020.
Not only is it more expensive to manufacture semiconductor chips in the United States; the U.S. has also failed to incentivize chip production. China, on the other hand, has made tech self-reliance a national issue. Chinese manufacturers have been struggling in lockstep with their American counterparts, and the country has responded by investing billions in equipment to manufacture more semiconductors.
Until production can catch up with demand, businesses must look to source raw materials elsewhere. Chinese vacuum brand Dreame Technology was so hungry for chips that it shifted part of its marketing budget to managing supplier relationships.
Future pandemics and geopolitical instability may make it impossible to source raw materials from certain countries at times. I believe that cultivating a diverse network of suppliers around the globe will be critical to businesses’ long-term survival.
3. Prioritize the products that hit assembly lines
With no end to the chip shortage in sight, companies will have to reshuffle their priorities for the foreseeable future. When appliance manufacturers started to feel the strain of the chip shortage, they responded by adjusting production. Since they only had enough microcontrollers for so many refrigerators and washing machines, some reduced production of their cheaper line in favor of more expensive appliances.
Some automakers are shifting from a just-in-time production model to just-in-case manufacturing, which could be the biggest turn the industry has taken in decades. But companies that don’t have the resources to stockpile raw materials should allocate the lion’s share of semiconductors to their most popular standbys or to products with the highest profit margins. That doesn’t mean phasing out other lines permanently. In fact, marketing these products as limited-edition goods could make customers want them even more.
The ripples of the semiconductor shortage are being felt across nearly every industry, and it’s not likely to end anytime soon. Businesses of all sizes are feeling the squeeze short-term, but savvy companies are finding workarounds that I believe will lead to long-term innovation. The secret to surviving the chip shortage isn’t reverting to stone-age technology. It’s about finding solutions in software, getting better at sourcing, and realigning production priorities.
