The Impact of the Worldwide Shortage of Microchips on the Electronic Security Industry

A time period we will never forget is the COVID-19 pandemic of 2020-2021. The virus and its affect surfaced in January of 2020 and within two months, much of the world was beginning the lockdown that has lasted for over a year. This global pandemic has negativity affected almost every person and business on earth.

Since our industry is electronic security, it seems appropriate to discuss the events of the pandemic and how they affected the worldwide supply of integrated circuit chips, also known as IC chips or microchips, used in security products. To get straight to the point, we are in the middle of a worldwide shortage of the IC chips — parts that are the lifeblood of the electronic world, so much so that if any interruption to the supply of IC chips is experienced, digital product production and world economies can be negatively impacted. The current IC shortage is slowing the ability of industries and economies to come back from the pandemic and is affecting every economic sector from automobiles and smart phones to TVs and game consoles — and, of course, electronic security products including control panels, modules, sensors and detectors. Almost every electronic security product manufactured in the world today uses an IC.

What Is an IC Chip?

An IC chip is a wafer of semiconducting material called an integrated circuit or chip. It is a set of interconnected electronic components such as transistors and resistors that are imprinted onto a tiny chip of semiconducting material such as silicon. IC chips are usually used for the logic component or programming portion of an electronic device or for memory. An IC is integral to almost every electronic device and has helped to greatly reduce the size and cost of products.

The majority of IC chips are produced in Asia with the U.S. share of production at 12 percent. As a point of reference, in 1990 the U.S. produced 37 percent of the global semiconductor market.

Why Is There a Shortage?

In early 2020 there was a significant reduction in demand for electronic components and users, customers and manufacturers of electronic products were canceling and pushing out delivery dates of orders. The IC manufacturers and their subcontractors responded by reducing inventories and safety stocks. Then manufacturers of IC chips stopped production and shut their doors as a result of COVID-19. Most IC manufacturing facilities did not produce a product for three to four months, but during this time, orders kept piling up. When the pandemic reached full lockdown, consumers stocked up on all things electronic, which tightened inventories. This resulted in panic buying of IC chips by manufacturers, pressuring already tight inventories and driving up cost. Additionally, when the pandemic hit, auto makers saw a drop in demand that resulted in canceled orders for IC chips. When car sales rebounded and grew at a higher-than-expected rate, auto makers tried to reorder the canceled parts, but found they could not.   

When IC chip factories reopened their doors in the second quarter of 2020, they did so with reduced capacity, and needed to fulfill the backlog of orders that sat idle for three to four months. At the same time, new orders continued to come in to IC chip manufacturers.

Product manufacturers that utilize IC chips and other electronic components in their products were seeing a significant jump in their orders and wanted to receive IC chips and other electronic components at an accelerated rate. Subsequently, in Q3 2020 IC chips orders grew to 170 percent over normal orders. Since increasing manufacturing capacity quickly was impossible, there was no way to make up for the increased orders and the worldwide shortage grew. During this same time period, U.S. sanctions against China’s tech companies further tightened the supply.

The Current State of IC Chip & Other Electronic Component Orders

With the demand for electronics continually growing and a desire to increase IC chip manufacturing in the U.S., there are plans for four new factories to be built in the U.S. On May 24, 2021, U.S. Commerce Secretary Gina Raimondo said that a proposed $52 billion boost in U.S government funding for semiconductor production facilities could result in seven to ten new U.S. factories. “This will take years for the Commerce Department to make these investments,” said U.S. Senator Mark Warner (D-VA).

High demand for IC chips also means high demand for all other necessary electronic components such as resistors, capacitors and PCBs (PC boards). In some cases, the current lead time for ordering IC chips and other components is approaching a full year — orders placed now will be shipping June 2022.

How are Distributors of Security Products Adapting?

According to the vice president of a large security products distribution chain, “We have been informed by several security products vendors to expect delivery delays, as parts shortages have increased recently. Lead times for many components, especially microprocessors used in wireless devices, for instance, have seen a transition from 14-20 weeks to 48 weeks in some instances. Many vendors report that they must now fully purchase components at the time of ordering and then wait for 10 months or more to receive the completed products from the factory. Industry sources expect that all of 2022 will be conducted under these conditions with improvement in lead times possible in 2023.” This source recommends that security dealers prepare to submit forecasts and POs for the next 12 months of critical items to avoid long periods of product shortages.

When Will the IC Chip Lead Time Return to Normal?

It is expected that we will see a return to normal IC order lead times late in 2022.