Suresh Acharya, professor of practice in the Robert H. Smith School of Business at the University of Maryland, explains how the semiconductor supply chain works, why there’s a shortage of product, and what are the prospects for an early solution.

Semiconductors move through a complex supply chain that includes several types of designers and manufacturers. But all have been affected to some degree by the current shortage of product. COVID-19 has had a significant impact on the demand side, with a marked shift in customer profiles. Stung by the recession, automotive manufacturers cut back on their orders for semiconductors, but the slack was more than taken up by producers of consumer electronics such as games and laptops, in response to a market driven by more people staying at home. When the demand for new cars began to rise, automakers found themselves unable to procure sufficient volumes of semiconductors, forcing them to once more curtail production

The disruption of supply caused by factory closures in Asia has further contributed to the current supply shortage, as has the long-term impact of a chill in U.S.-China trade relations. Chinese companies began stockpiling product, so there was less of it available for export.

More than 90% of semiconductor chips consumed around the world are made in Asia. And while 50% of global demand comes from the U.S., only 12% of total production occurs here. That disparity results in long supply chains and the risk of further disruption. But there are no short-term solutions to the problem, Acharya says. The Biden Administration’s executive order directing a review of critical supply chains, include those of semiconductors, is unlikely to have an immediate impact on the gap between supply and demand. Building new plants is a lengthy and expensive process, Acharya notes.