When the chips are down: material scarcity in the tech industry

The more we head into that Internet-of-Things future — a world of smart doorbells and smart pet feeders, but also smart infrastructure — the more we rely on microchips. But an ongoing global shortage has thrown a wrench in the supply chain for these devices.

Semiconductors are small chips, often made from silicon, used in cars, home appliances and electronic devices, among other technologies, for things like power regulation.

As many people began telecommuting last March, home offices and electronics got upgrades to support the new work situation. And car manufacturers, expecting a drop in demand for new cars, cut down their orders on semiconductors.

"A lot of the semiconductor manufacturers, the companies that actually make the chips, allocated their capacity to the sectors that were hot. And by the time, for example, the automakers came back and said, 'Wait a minute, I need some more of those chips.' The capacity was already booked out for many, many months. And they were quoted a very long lead time, so then they couldn't get the chips," Willy Shih told Spark host Nora Young.

Shih is a professor of Management Practice in Business Administration at Harvard Business School and supply-chain expert. His research focuses on manufacturing and product development in industries ranging from semiconductors to consumer electronics.

He said that with its wide-reaching, cross-sector impact, the global chip shortage is likely to get worse before it gets better.

"This problem is probably going to take a long time to work through because the manufacturing cycle for these chips is relatively long. It takes a minimum 40 days, maybe 6 weeks or more to produce some of these chips. So, it's not like you can turn them on or off like a faucet," said Shih.

The chip shortage has had a huge impact all over the world, with several major automakers closing plants, including here in Canada. In Windsor, Ontario, Canada's "automotive capital," GM, Ford, and Chrysler all idled their plants, suspending production and leaving thousands of people out of work, and the shutdowns have been extended several times.

While the pandemic changed consumer demand, the chip shortage isn't just a product of the current health crisis. It's a deep-seated problem of supply chains and our growing appetite for networked objects.

"The current semiconductor supply chain is very, very global, much more so than most people realize." 

The manufacturers of chips have tended to concentrate in a couple of areas, mainly Taiwan and also in Korea. And while there are some manufacturers, like Intel, that process silicon wafers in their domestic factories in the US, most will send those wafers to Asia, where they will be tested and then cut with diamond saws into individual chips and then packaged.

Recently, a group of Canadian tech executives founded a national semiconductor council in response to the chip shortage. Their goal is to turn Canada into a global hub for semiconductor research, design and manufacturing. A similar body called the Semiconductors in America Coalition was also launched in the U.S. this week.

However, Shih said it will take a lot more to shake up a now 60-year-old industry, where manufacturing and packaging have been largely outsourced.

"I think people don't realize how long this kind of manufacturing concentration in Asia has been building," said Shih.

In North America, Intel has some advanced capacity, but the Taiwan Semiconductor Manufacturing Company is a leader, said Shih, and that position has been built over more than 30 years, at investment levels of several hundred billion dollars.

He said the pandemic offers some important lessons, like the need for supply chain visibility. "A lot of manufacturers didn't realize that they shared suppliers or a supply base several tiers down in their supply chain."

The other, he said, is the dangers of lean inventories. "So many people are allergic to having inventory, because inventory ties up cash, inventory risks obsolescence, but when you don't have inventory, then when you have these disruptions, as we have seen over the last 15 months, then it can cost you much more than you realize."

The ethics of rare earth elements

But scarcity in the tech industry goes beyond a scramble for chips. There's a heavy reliance on rare earth elements to produce the devices we use every day, as well as green technology, like windmill turbine motors, said social scientist Abigail Martin. 

"Today, from plastics to fuel we put in our cars, to every single screen we use, light bulbs, certain types of eyeglasses — these rare earth elements, which are magnets essentially, are everywhere. And they're really important to industrial society." 

Martin said there are 17 rare earth elements. Among them is neodymium, which has been most talked about because of its importance for electric vehicles. These elements are largely found in the mountainous regions of Canada, the western United States, Australia, China and Mongolia.

"This kind of isolated terrain is where you can do these very extensive, environmentally unfriendly operations."

But while the name suggests that they're hard to come by, that's not exactly the case, said Martin.

"What makes them rare, really, is the processing capability. So the ability to not just take them out of the earth, but turn them into something useful. And right now China has by far the most processing capacity. And so in that sense, it's really a rare refining supply situation rather than an actual scarcity."

The challenge is in the extraction and processing of these materials, which are water, land and energy intensive, and involve chemicals, she said. "Rare earths are a bunch of different elements that are always found mixed up with other elements. So you never find them conglomerated, they're always kind of part of this agglomeration of other minerals."

The process of pulling apart the material and separating out the actual value leads to a lot of contamination. 

The biggest danger generated from that processing, Martin said, are the excess chemicals and minerals that are discarded and go into big tailing ponds.

There are also geopolitics at play when it comes to this sort of resource extraction. 

"China has a monopoly on them. And it has, from time to time, used that monopoly to create scarcity and drive up prices and also create a competitive advantage for its own manufacturers," said Martin.

Countries like the US, Canada and Australia are trying to diversify the supply chain as a way to reduce their dependence on China. But she said that has nothing to do with the environment.

"That just has everything to do with ensuring that downstream, predominantly Western firms have access to cheap materials."

However, within that push to diversify, Martin said there are real opportunities to start thinking about how we create supply chains that are not based on heavily environmentally impactful mining operations.

"The basic fact remains that when you are removing these resources from the earth, you're leaving behind big scars on the land. And there's no real way around that. And it's not just scars that are visual, these are also scars that are very much toxic and environmentally harmful for the people that live there."

Martin said there's a lot that has to be done in order to create a more circular economy and be able to both recycle and reuse these rare-earth elements, as most that are used in cars and electronics are designed into the product in a way that makes it really difficult to extract. 

"You have to have a way to kind of push engineers, whether it's in public R&D labs, government-run R&D labs, or private sector R&D labs, to start thinking about how to design products in a way where you can have these elements in there that can be easily extracted."

Written by Samraweet Yohannes. Produced by Samraweet Yohannes and Adam Killick.