Global chip shortage may soon turn into an oversupply crisis

Alicia Garcia Herrero艾西亞
4 min readFeb 24, 2022


Alicia Garcia Herrero, Natixis Asia Pacific Chief Economist, Bruegel Senior Fellow

From supply chain bottlenecks to rising inflation, an important question for all stakeholders is whether we are going to see an end to the chip shortage crisis.

While the limited supply of chips has resulted in higher prices for consumers, other repercussions include the disruption of industrial activities and supply chain security.

There are cyclical and structural reasons for the sharp increase in the demand for semiconductors. Cyclically, with so much labor and education shifting online, the pandemic has unleashed strong pent-up demand for electronic products. The stockpiling that we saw in 2021 has also resulted in transportation bottlenecks.

Structurally, electrification, such as the mass production of electric vehicles, and digitalization need semiconductors, mostly of the high-end variety that can only be produced by the most advanced semiconductor foundries, which happen to be concentrated in Taiwan.

In response to this rapid increase in demand, established players in the semiconductor industry have responded in two ways.

First, with a massive increase in capital expenditure, the most obvious case being that of Taiwan Semiconductor Manufacturing Co. (TSMC), the largest foundry in the world, which will raise its capital expenditure from $30 billion in 2021 to up to $44 billion this year. Such an increase can only be justified by the expectation that global demand for semiconductors will keep rising.

Second, governments in several major economies have implemented huge spending programs to try to boost local chip production. China started this race in 2014 with the establishment of two consecutive big funds to support indigenous innovation in the semiconductor industry, which Beijing has identified as one of the most important steps China must take if it is to move up the tech ladder.

The total Chinese investment under the scheme already stands at around $50 billion. This is bound to have an impact on chip supply down the road but very possibly only for less advanced semiconductors.

Together with similarly large packages approved by the U.S. and the EU to support their own semiconductor industries, this may indeed result in long term oversupply, especially at the lower end of the industry.

It seems clear that manufacturing capacity for less advanced semiconductors will grow rapidly from next year onward as more investment plans are realized. Even though TSMC is increasingly specialized in advanced manufacturing, the company will still allocate up to 20%, or around $9 billion, of expanded capital expenditure toward less advanced chips. That is more than the rest of Asia combined with more companies lining up to boost chip production.

Taiwan-based United Microelectronics, the third-largest foundry specializing in matured nodes, will also increase capital expenditure by 66% to $3 billion in 2022. As for China’s largest semiconductor company, Semiconductor Manufacturing International Co. (SMIC), invested on average $4–5 billion in the period 2019–2021 on mature nodes, which means its production capacity will grow fast, but again only for those chips used in everyday electronic appliances.

Another trendsetting development taking place in the semiconductor industry is the overseas expansion being undertaken by leading chipmakers in greenfield projects or acquisitions.

With the global supply chain increasingly shaken by U.S. sanctions on key Chinese companies, many semiconductor foundries have been caught in the crossfire. After all, China forms 35% of global semiconductor demand even though its companies only produce 6% of global supply.

Against such a background, TSMC has announced its plan to further investment in the U.S. and Japan, and potentially Germany and the Czech Republic in the future. In the same vein, electronics contract manufacturing giant Foxconn, which employs more than a million people in China, has just announced its plan to invest in India to produce chips.

In the specific case of Taiwan and TSMC, another reason that is often being overlooked for expanding production abroad is the island’s relatively high seismic risk and limited supply of engineers and electricity for the massive investment that many of its semiconductor companies are planning.

All in all, chip shortages will ease slightly in 2022 with more production in Asia, but a massive wave of new supply will be on stream in 2023. Given that the bulk of that production will only be for mature node semiconductors, only higher-end chips will face shortages.

Of course, another potential bottleneck for the entire industry is the supply of vital rare earths and other raw materials needed to manufacture the semiconductors themselves, which could be in jeopardy as a result of rising geopolitical tensions.

Other uncertainties include climate change and the need to meet various emissions targets, which are bound to affect the production of semiconductors as well, and any resulting upward pressure on energy prices.

Still, the massive investment in mature node semiconductors does point to a potential bifurcation in the supply of semiconductors, with the least advanced ones experiencing huge supply increases, if geopolitics and rare earths are permitting, while the most advanced chips, which are key for new technologies, will remain scarce.

This means that the largest sector of the semiconductor industry may end up saddled with overcapacity. Instead, those producers shifting operations toward the higher end of the market, such as TSMC, will see their margins increase as demand continues to outstrip supply.

*This article was originally published by Nikkei Asia at