Imagine an ordinary citizen’s house. How many electronic devices would there be? Now imagine that every single product no longer works, and it is impossible to replace any of them due to the lack of supply. This is what would happen if there were no semiconductors available, along with the destruction of most social infrastructure including the medical network and train operations. Since 2020, the global chip shortage has been an ongoing crisis that is affecting almost all countries. With South Korea being one of the main manufacturers of semiconductors, it is crucial for the nation to devise practical solutions to restore chip supply and support national economy.

Numerous industries and companies have been suffering from a shortage of semiconductors, including the Chinese tech giant Xiaomi. During the company’s fourth quarter earnings call, President Wang Xian stated that the global chip shortage has taken a huge toll on the company’s costs and warned about potential increases in product prices. According to India Today, four months later, the company released a statement that said it expects a three to six percent increase in prices of smart TVs. Xiaomi, commonly known as an affordable brand, raising its prices indicates that the shortage has caused unavoidable damages to the company.

The global automotive industry is not an exception. In fact, it is easily the most heavily impacted sector, with the shortage costing it 210 billion United States (U.S.) dollars, according to consulting firm AlixPartners. In response to the situation, executives from various automotive companies have publicly expressed concern. Herbert Diess, Chief Executive Officer (CEO) of Volkswagen Group, reported through Bloomberg that “it will be probably a bottleneck for the next months and years to come.” The lack of supply of semiconductors is causing a surge in the prices of vehicles, along with unemployment and short-term layoffs across the industry.

Looking Into the “Why”: Short-term Causes and Long-term Problems

The coronavirus disease (COVID-19) undoubtedly plays a major role in creating the global chip crisis. Regulations against the virus have required a switch to remote work and learning in most countries, which led to an increase in demand for digital devices to support the new online lifestyle. According to The Korea Industry Daily, the domestic semiconductor industry showed a 10 percent increase in production, a trend which is expected to continue even after the pandemic dies down. With the Delta variant unexpectedly going on a rampage, the untact, or zero-contact, era continues.

Another short-term reason for the sudden increase in demand for semiconductors traces back to the automotive industry. This is because the implementation of new technologies, including advanced driver-assistance systems and autonomous driving, in recent models is gradually becoming a common feature. As a result of the shortage, several automotive companies were forced to shut down their local factories earlier this year. Hyundai Motor Company, for instance, had to put a halt on all productions in its Ulsan factories as they lacked semiconductors produced in Taiwan.

However, a deeper dive into the automotive industry shows that the drastic chip shortage is caused by a larger systemic issue, rather than several recent events. The subject in question is the Just-in-Time (JIT) inventory management method, which means companies receive raw materials from suppliers only when they are needed. Introduced in the 1950s by Toyota Motor Corporation, this method was quickly adopted as an industry standard as it minimized inventory costs and therefore increased efficiency. Yet, without a steady supply of semiconductors, the JIT methodology failed to meet the rapid increase in demand for products that require the technology. In essence, by prioritizing productivity over stability, the automotive industry lost balance between the two as COVID-19 hit.

The final blow that created this all-around disaster is the fact that semiconductor factories are primarily concentrated in Southeast Asia. The idiom “don’t put all your eggs in one basket” best explains this phenomenon. For instance, Taiwan Semiconductor Manufacturing Company (TSMC) takes up 70 percent of the global production of micro-control units (MCU), a core part in vehicles. However, the unexpected spread of the Delta variant, coupled with prolonged drought since the summer of 2020, has heavily impacted TSMC. Considering that about 40 MCUs are required per vehicle, if TSMC’s production completely shuts down, the damage will not be limited to domestic automotive industries.

Outlook and Solutions within South Korea

In response to the damage caused by the semiconductor shortage, the Korean government, along with Samsung Electronics and SK Hynix, has decided to invest 450 billion won by 2030 to foster the domestic semiconductor industry. Other governmental efforts to push domestic semiconductor production include tax cuts of more than 40 percent for Research & Development (R&D) expenses. The nation’s decision to switch gears from importing semiconductors to manufacturing them at home reflects how chips are a necessary puzzle piece for domestic industries.

Korea’s automotive industry is particularly welcoming of such changes. This is because South Korea relies on imports for 98 percent of its automotive semiconductors, despite being the world’s fifth largest automobile powerhouse. Professor Kim Gwang Suk (Graduate School of International Studies, Hanyang University) explains that this disparity creates a system that fails to guarantee a stable supply of components necessary to produce vehicles. Since trade can be affected by various factors, including political relations and inflation, being dependent on foreign countries for key components is not a suitable method in the long run.

Ultimately, Professor Kim points out, the problem lies in domestic semiconductor companies’ lack of interest in producing automotive semiconductors, as its complicated inspection process and high initial investment cost make it unprofitable. However, he claims that “now is not the time to discuss profitability; the nation must develop an automotive semiconductor industry for its economic stability.” In order to encourage businesses to enter the industry, the government needs to establish policies such as providing corporate tax benefits and sharing R&D budgets. The end goal is, as Professor Kim puts it, “localization of materials, parts, and equipment.”

Although the supply of semiconductors is gradually being restored thanks to the immediate reaction of many corporations, the aftermath of the shortage may never be fully recovered. In order to stand its ground in the upcoming semiconductor race, South Korea needs to dissect the causes behind this global mishap and devise solutions that will help the nation’s economy in the long run. Whether it be changing the current production methodology or expanding its participation in the automotive semiconductor industry, South Korea has a long way to becoming a chip giant.