How the Microchip Shortage Could Affect Your Startup
Since the collapse of the international supply networks brought on by the COVID-19 pandemic, the proportion of microchips produced in the United States has decreased from 37% to 12%. Although the supply chain will eventually recover, its disruption has made reshoring American manufacturing more prominent.
Naturally, addressing chip shortages has come into emphasis. Even though the “big three” chip manufacturers (Intel, Samsung, and TSMC) are trying to keep up with demand, it is high and will only continue to climb. Natural disasters have continued to make logistics more challenging, from excessive flooding to fires and deep freezes.
Supply chains are also being disrupted by traffic jams at important ports and delays in cross-country transportation. We have previously discussed injection molded plastic lead times, with shipment delays potentially extending them. In addition, the chip shortage will undoubtedly continue to significantly impact manufacturing production until the numerous mismatches in the supply chain are resolved.
Although the automotive and consumer electronics sectors dominate the news, the chip shortage impacts other sectors of the economy as more products and procedures call for chips.
What Caused the Chip Shortage?
By now, you’ve probably heard about the great chip shortage. Consider Covid 19 as the umbrella, while three main factors for the shortage fall underneath it.
When the pandemic started, automotive manufacturers halted chip orders to save money. They anticipated fewer sales, so there was no need. What resulted was that production couldn’t keep up with the regular schedule, causing the need for those chips to increase significantly.
While manufacturers and governments scramble to make headway on the shortage, it’s certainly taken a toll, and catching up might take longer than anyone anticipated.
Second, during the pandemic, we all found ourselves at home for an extended period. The demand for electronics and gaming systems exploded with so much home time. Companies struggled to keep up and found themselves in the same boat as the auto manufacturers.
Last, logistics took a huge hit when the pandemic struck, and it is still a log jam in many situations. Technology, machinery, and other industries all start with semiconductor chips. Due to a lack of these chips, company operations have not progressed at their regular speed.
Due to the COVID-19 epidemic, there is a vast supply. When early epidemic shipping ports reopened, they ran into freight restrictions and had mountains of goods waiting to be delivered.
Chronic global labor issues haven’t helped, and the supply chain still needs time to recover. Working on alternatives can also be difficult, given that the shortage of semiconductor chips will last for a while.
Which Industries Have Been Hit the Hardest By the Chip Shortage?
The impact of worldwide chip scarcity is felt throughout numerous businesses, but not equally. The automotive industry is being severely damaged. Many automakers, including those in the United States, are currently being forced to temporarily halt, slow down, or delay production due to the acute shortage of sensors and other electrical components. This could mean any of the following, and some of this has already happened for many manufacturers.
- Potentially increased unemployment
- A slower rate of economic recovery
- Fewer vehicles are produced
According to some analysts, the fast-rising demand for consumer electronics, especially during the pandemic, is to blame for the chip scarcity in the automotive industry.
According to recent research citing Canalys, the global PC industry saw its largest quarterly growth in ten years, rising by 55% in just the first quarter of this year. This is after the pandemic prompted workers to work from home and students to adopt virtual learning.
Gaming consoles are also performing well on the market despite being unnecessary. According to a different prediction made by Fortune Business Insight in May 2021, the consumer electronics industry might experience a compound annual growth rate of 5.3% through 2027. The revenue may have increased to $51 billion by then.
However, their increased use has resulted in a greater demand for sensors and semiconductors. Unfortunately, semiconductors made for automobiles cannot be used in consumer electronics, and vice versa. In the interim, the shortage may result in poorer company profitability or higher consumer costs, preventing more people from affording the products.
Also hit hard by the chip shortage was the LED and lighting fixture industry. Recent reports claim that the COVID-19 epidemic slowed or even stopped residential and commercial property construction, remodeling, and improvement.
This indicates that there was a minor decrease in the demand for smart homes. Light-emitting diode (LED) lights are also in short supply, which is thought to be a more environmentally friendly alternative to halogen, incandescent, and fluorescent lights.
Interestingly, the effect of the chip shortage in this market might cause the cost of this raw material might decrease, increasing the product’s affordability and marketability.
Mini LED lights are another story. These are currently utilized in numerous appliances and consumer devices, such as televisions and smartphones. It is theorized that several manufacturers who employ these materials began hoarding as early as the fourth quarter of 2020 to offset the need and potential rising costs.
Solar and turbine power may be dealt a serious blow, impacting their global rise in the last few years. Although steel or aluminum makes up most of the renewable energy options, some of its internal components, such as semiconductors and sensors, are controlled or maintained electronically.
There is no precise end date for the chip shortage, which might cause postponing renewable energy goals and pricing and, consequently, consumer and company acceptance.
What Does the Microchip Shortage Mean for Startups?
Although the automotive and consumer electronics sectors dominate the news, the chip shortage impacts other sectors of the economy as more products and procedures call for chips. Startup businesses and inventors are also being compelled to find alternatives in all regions of the world. It’s essential to examine how early-stage innovation and small- and medium-sized manufacturers are affected by chip scarcity, as it is bound to impact us as we continue to move forward.
The microchip shortage is especially painful for businesses either in the production phase or currently planning for the production phase. Those in the design stage are not as negatively impacted. They can still buy chipsets from chip resellers or component distributors in lesser quantities. However, due to their lower purchasing power, potential inability to predict component quantities, and significantly greater cost of financing than larger companies, these chip shortages pose a challenge for the startup ecosystem.
There are significant delays for those attempting to plan for production, particularly for many of the small- and medium-sized manufacturing (SMM) clients. In other instances, it was necessary to redesign circuit boards using a chipset that would be out there when the maker needed it. Many developers observe component-level decisions based on these chips’ future availability during this supply-chain gap. Several manufacturers are buying and stockpiling test amounts themselves to avoid redesigning the board or re-program firmware based on a different sensor or CPU. Look into more efficient electronics prototyping tips and tricks when working with what is available.
Longer development times result from the necessity to modify a sensor or component that is not currently available. To redevelop a product to work with a different sensor, the board must be respun, the firmware must be re-programmed for the unique sensor settings, and additional testing must be performed to assure functionality. This results in significant delays in product releases and can hinder firms trying to grow quickly. Not to mention that going back to the drawing board is frustrating and time-consuming.
Startup businesses developing new products are still building their cutting-edge technology in small batches, but the chip shortage increases the demand for more up-front funding and encourages placing component purchases a year in advance. There has been a significant fluctuation in the supply of these chips when we look at startups that are in direct competition with larger manufacturers who are snatching up the majority of the available supply, even from some of the smaller well-known component vendors. Stock levels can change significantly second by second.
Collaborating with a larger community, supplier networks, and corporate partners may help, but the process can be daunting and feel overwhelming as everyone is scrambling to develop a plan. Startups are supported as they attempt to make accurate predictions thanks to data from companies who are pouring research into the shortage and other information shared within networking circles. Startups often find it more challenging to anticipate 30-week results with the same level of accuracy as an established company with a long-running product.
Advice & Insights for Startup Businesses
If you want to start a business from your product, seek advice from larger companies. Networking has never been more important. Within these ranks, alternatives may be found and sound advice on where to go from here.
Make Great Efforts to Verify the Demand
Given the current supply chain’s difficulties and limitations, demand assessment is even more crucial. Entrepreneurs must spend a lot of money early to obtain chips, making efficient demand validation even more essential. Some may even suggest that the demand analysis is more crucial than the product’s design. Although it may seem counter-intuitive, given a component shortage, the solution is to better understand client demand rather than reinvent your product.
Be Thorough in Your Forecasting
One of the most crucial tasks for startups to complete is forecasting, especially when business owners may not always understand the true level of demand for their product. To determine the degree of interest in the developed product, it is essential to do more than simply speak with the intended consumers. Conducting some consumer tests is one of the most dependable ways to confirm there is a market for your product. This would allow business owners to anticipate their revenue using facts.
To better estimate the actual demand for the goods, an experiment can involve publicizing the product and counting the number of orders that result from it or taking pre-orders. With that method of testing, the firm may get information on how customers spend their actual money, empowering them to make well-informed decisions. Startups invest a lot of time and energy into building and scaling their hard tech, so they want to know that there will be a market when it’s time to make it available to the general public.
Try Production Scheduling to Raise the Required Capital
Startup businesses must outline a plan for procuring all the components required for a production run to plan for manufacturing. It is preferable to secure that money as soon as possible because, in most circumstances, production planning will involve obtaining the funding needed to guarantee output.
When Will We See a Change?
Although many predict that the chip shortage will endure for the next one to three years, this lack of chips is just transitory, and, likely, the market may even overreact. Congress is addressing the chip shortfall with legislation and money aimed at injecting $50+ Billion into American semiconductor production with the passage of the U.S. Innovation and Competition Act of 2021.
Even though the current global chip shortage will not be resolved by this increase in domestic chip production, turbulence can be managed by collaborating with regional networks that are especially suited to aid startup companies. To bring together the entrepreneurial ecosystem around physical product innovation and ensure that the manufacturing sector continues to expand, accelerate, and thrive, these startup businesses need to continue to receive support.
For some, this means leveraging federal grants to encourage entrepreneurs and promote job creation and economic development. Early-stage innovators have a higher chance of success thanks to access to the necessary tools and contacts in the manufacturing sector, which helps them move from prototype to product to viable business even in the face of a chip shortage. In the meantime, it’s necessary to continue to develop alternatives, new plans, and relationships that will not only get through this chip shortage but be beneficial for years after.
