6B.The Causes and Consequences of China’s Chip Shortage Crisis

The Causes and Consequences of China’s Chip Shortage Crisis

China is still suffering from shortage of electronic materials in 2021. Shortage still appears in both the production of wafer from the upstream (raw material of chips) and the secondary production of chips from wafers. We will discuss below the reason of this situation.

The global shortage of chips is an in disputable fact. Manufacturers have been placing panic orders while chip manufacturers are striving to buy enough wafers to maintain their production efficiency. Which country will be affected the most if the shortage in chips continue? China must be top of the list

Analysis of the Demand and Supply of Chips

We will be presenting the phenomenon of shortage in chips by Demand-and-supply Diagram. Under original price P0,since the price is below equilibrium price, the chip market of China is in short of supply. Quantity demand Q D1 is larger than quantity supply Q S1, and thus the shortage (or excess demand) is QD1-QS1 units.

Due to the US sanctions and the COVID-19 pandemic, these factors have reduced China’s supply of chips. We use S2 to indicate the new supply line.

At the same time, demand for chips in all industries has been rising. This may be because people spent much more time at home during the pandemic, which also increased the demand for home appliances and electronic devices. This has resulted in a derivative demand on chips Therefore, the demand curve will shift to the right to D2, and the shortage will rise to (Q D2-QS2) units.

(p.s.: for simplicity, we assume the price of chips is fixed at Po due to terms on long-term supply contract)

Shortage Hits Multiple Industries

All major industries in China are facing shortage in chips, including automobile manufacturing, mobile phone manufacturing, as well as industries with relatively low production technology such as electrical appliances manufacturers.

The sales of automobiles exceeded expectations during the pandemic, causing a tight supply on automotive chips. There are many automobile manufacturers in the world, and many of them have reported suspension on production due to shortage of chips recently. The representative of the China Automobile Association said that China’s shortage in chips has already began in late December last year; and this will greatly affect the production of automobiles in the first quarter of 2021. Some analysts predicted that this wave of automotive chip shortage crisis is likely to last for six months. This situation will inevitably have a negative impact on China’s GDP.

As for the mobile phone industry, Huawei, which has been sanctioned by the United States, is facing a significant drop in sales, as their high-end 5G mobile phones are out of stock in China due to shortage in chips. Frankly speaking, there is no incentive for manufacturers to reserve capacity if they have enough chips. This may be remaining impact of the sanctions brought by the former Trump administration.

Upon Biden’s new administration came to power, he has repeatedly expressed his disapproval of Trump’s use of sanctions to achieve his goals. I believe that some of the previous measures will be overturned and drastically adjusted, which may help to restore some of the supply of chips from the US to China and help to ease the shortage.

Selected Concept

Shortage (or Excess Demand)

It refers to the difference of quantity supplied and quantity demanded when the price of a good is lower than its equilibrium price.

Secondary Production

Secondary production refers to the production of finished capital goods.

Gross Domestic Product

Gross Domestic Product refers to the total market value of final output produced by local resident producing units in a specified period.

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