While the world has largely recovered from the chip shortage of 2020 to 2023, only 26% of organisations that rely on them currently feel that their supply is sufficient, according to a new report by the Capgemini Research Institute.
The report revealed that the AI boom has executives worried about whether fabs can keep up. In fact, 59% of 800 global downstream industry leaders said supply issues are an ongoing concern when surveyed in November 2024. They expect semiconductor demand to have increased by 29% by the end of 2026.
This rise in demand is almost double the growth rate anticipated by executives in the semiconductor industry, 250 of which were also surveyed by Capgemini.
“Gen AI is driving accelerated demand for chips, and semiconductor companies face increasing demands from customers who want more personalised and software-centric experiences,” said Brett Bonthron, Capgemini’s global high-tech industry leader.
The effects of the last global chip shortage are still being felt by downstream industries
Since the inception of the current AI boom, chipmakers have thrived.
Leading graphics processing unit seller NVIDIA announced record revenues of $30 billion (£24.7 billion) in the second quarter of 2024 and has a stock market value of over $3 trillion (£2.2 trillion). Switch manufacturer Broadcom and memory chip maker SK Hynix have seen similar success.
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These record profits have been realised by only a handful of core companies that control large portions of the supply chain. NVIDIA, an American company, designs most GPUs used to train AI models. However, they are manufactured by Taiwan’s TSMC. TSMC and Samsung Electronics are the only companies that can make the most cutting-edge chips on a large scale at the moment.
But it has not always been plain sailing within the industry. A global chip shortage was sparked in early 2020 due to the COVID-19 pandemic. Nearly half (47%) of downstream organisations surveyed by Capgemini had to curtail some product or feature launches as a result.
By July 2023, manufacturers had accelerated production, and their customers had adjusted to a more predictable chip supply. Improvements in production capacity and demand for consumer electronics cooling off have since allowed industries to adapt and recover.
However, the Capgemini report found that 49% of downstream organisations consider the impact of the chip shortage to be ongoing as of November 2024.
Geopolitical tension is the biggest concern for chip-reliant businesses
Only two out of five organisations that rely on semiconductors are confident in the resilience of their supply chains, Capgemini found. The main factor causing this concern is geopolitical tensions, cited by 69% of respondents.
Military escalation between Taiwan and China could lead to serious disruption of TSMC’s output, creating a ripple effect on supply chains. In January, it was reported that Chinese cyber attacks on Taiwan’s government had doubled over the last year.
Similarly, other countries are placing export restrictions on the sale of semiconductors to China due to tensions with the country, including the U.S., the Netherlands, and Japan. The U.K. also blocked most license applications for companies seeking to export semiconductor technology to China in 2023.
SEE: China Investigates NVIDIA for Allegedly Breaking Monopoly Law
In August 2023, China’s Ministry of Commerce announced it would implement export controls on gallium and germanium-related items “to safeguard national security and interests.” These rare metals are essential in chip production, and China produces 98% and 54% of the world’s supply of gallium and germanium, respectively.
After U.S. President Joe Biden’s administration announced its third set of restrictions on semiconductor exports to China in December 2024, China swiftly banned the sale of germanium and gallium to the U.S., closing loopholes from its 2023 export controls, and added several U.S. defense tech startups that cannot do business in the country.
Worries about fab capacity leading to quests for chip sovereignty
The second and third most concerning factors impacting semiconductor supply chain reliability are inadequate fab capacity and the limited number of suppliers, cited by 65% and 52% of downstream organisations respectively.
On top of human factors like geopolitics, natural disasters could also wreak havoc on supply chains if suppliers are based in just a handful of areas. A drought in Taiwan and three plant fires in Japan contributed to raw material shortages between 2019 and 2021, according to Electronic Products & Technology.
While a third of the downstream organisations surveyed by Capgemini are either considering or actively exploring in-house chip design, governments worldwide are spending billions to boost national capacity for semiconductor production. The semiconductor industry executives surveyed expect a 17% increase in domestic sourcing by the end of 2026.
In recent years, the U.S.:
Additionally, Intel, TSMC, Texas Instruments, and Samsung — the world’s largest memory chipmaker — have all announced plans to build new fabs in the U.S.
In August 2023, it was announced that the U.K. government would devote £100 million to fostering AI hardware development and shoring up possible computer chip shortages. Last September, Amazon Web Services announced plans to invest £8 billion in data centres in the country over the next five years.
SEE: UK Government Announces £32m for AI Projects After Scrapping Funding for Supercomputers
The European Union offered €43 billion ($46 billion) in subsidies to boost its semiconductor sector with its European Chips Act, which was adopted in July 2023. The bloc also has the lofty goal of producing 20% of the world’s semiconductors by 2030.
