How Did The Chip Shortage Get So Bad?

The current chip shortage has resulted in car dealers lacking inventory with tens of thousands of unfinished vehicles sitting in parking lots.

It’s hard to imagine that something as small as a quarter could halt the production of automobiles around the world.

Who would have thought that something as simple as a chip shortage could cause some turmoil in the auto industry? Here’s what you need to know if you’re wondering how things got so bad:

What Exactly is the Chip Shortage?

The chips that are on backorder are tiny transistors made from silicon. These semiconductors are used in computers, phones, and other electronic devices. The raw materials for these chips are typically found in Japan and Mexico. The chips themselves are mostly produced in Taiwan, China, and the United States.

Thanks to the Covid-19 pandemic, the world was turned upside down. One of the results of this virus was a higher demand for electronics. As the demand for these computer chips went up and the supply went down, we ran into the chip shortage that still impacts us today.

Why A Chip Shortage?

In the spring of 2020, many automakers, dealerships, and supplies had to close their doors while the economy went into recession. Many automakers feared sales would drop, so they canceled their orders for computer chips.

While auto sales did go into a decline at first, they quickly bounced back. More people wanted to own a car to avoid crowded public transportation options. Lenders were also offering insane financing offers, and dealers jumped into the modern world by selling vehicles completely online.

The demand for cars exceeded expectations. Automakers tried to get their computer chip orders back, but other products also saw an uptick in sales. People who were spending more time at home upgraded their computers, phones, video games, and more. All of these devices require computer chips as well.

To make matters worse, a fire at Renesas Electronics in Japan shut down a chip-producing plant for almost a year.

Competition is The Culprit

The main reason the chip shortage got so bad is that it impacted every industry at the same time. The world basically took a time-out, which meant everyone stopped ordering chips. Chip manufacturers also had to take a break and stopped making chips.

When it was time to go back to work, everyone needed chips at the same time. Production can only move so fast, so nearly every industry took a hit. Chip companies simply can’t keep up with the demand, which results in delays.

When Will It End?

Auto manufacturers and other electronic companies are keeping their fingers crossed that production will get closer to meeting demand before the end of the year. These assembly lines should see a steady climb in production rates over the next 18 months as well.

We’re not out of the woods just yet, but there is certainly a light at the end of the tunnel. With luck, the chip shortage will soon become a thing of the past.