The Semiconductor Shortage & Potential Litigation

Global supply chains have been dealt a destructive blow over the last year and a half, as the pandemic has led to supply crises across industries. One such crisis is the semiconductor chip shortage, which is likely to lead to a plethora of disputes and litigations in the coming years.  

This will be a continuing saga as, Intel CEO Pat Gelsinger states to Apple Insider, “The global chip shortage will continue to worsen for the time being, with the industry forecast to endure a worsening situation throughout the second half of 2021, before there’s any real hope of recovery.” 

This unexpected shortage was not only triggered by the COVID-19 pandemic but exacerbated by the blockage of the Suez Canal in March of 2021. Now, with many industries dependent on or largely enabled by semiconductors, companies are heavily focused on ensuring crisis management plans account for potential aberrations such as this one.  

According to an industry report by Fortune Business Insights, “Since the onset of COVID-19 in early 2020, the industry has been facing several challenges to maintain stable growth. The entire technology industry is trying to recover from the US-China trade war and 2019’s down cycle. The international Data Corporation (IDC) estimated a revenue contraction of approximately 6% in 2020 (with 54% of probability) for the global semiconductor industry over the forecast period.” This report confirms the setback imposed on the semiconductor industry by the pandemic.  

Let’s take a more granular look at a few specific industries impacted by the semiconductor shortage.  

The Auto Industry 

A lion’s share of articles on the shortage note its impact on the auto industry. The crisis started early on when automobile manufacturers cut orders, which proved disastrous when car sales improved earlier than expected, but their semiconductor suppliers had already committed production to other customers.  

This sent a massive supply shock through the automobile industry, as the modern car averages between 1,500 and 3,000 chips. This number is only increasing with innovation, and now businesses are strategizing on ways to avoid an analogous situation in the future. One such strategy is the mass acquisition of small-cost items such as chips that could halt production should they not be available. As supply chains are now weakened, maintaining a large inventory of these items could be an effective approach in the future.  

Consumer Goods 

Semiconductor chips are now commonplace across several household appliances and consumer goods, with low-margin processors being more utilized now than ever before. These processors are used in washing machines, toasters, microwave ovens, and much more. The supply shortage on these chips will likely be felt more severely over the next several months, as retailers are expecting to face challenges maintaining their inventory of these products. In some instances, this is resulting in the seeking of new suppliers or retailers being forced to pay higher costs. Some companies are increasing their inventory of highly sought-after chips, which is helpful for their own bottom line, but harmful for others looking to get a hold of their required supply.  

Smartphone Manufacturers 

Thanks to the stockpiling of semiconductors, smartphone manufacturers such as Samsung and Apple have mostly avoided the shortage of chips. While auto manufacturers made requests to reduce deliveries early on in 2020, smartphone manufacturers did not experience a significant drop in demand or request a reduction in deliveries. This allowed manufacturers to skirt the issue until now. 

With manufacturers across other industries beginning to reclaim their orders, competition has significantly increased, and mobile manufactures are beginning to feel the impact. Apple CEO, Tim Cook, released a warning recently regarding this crisis’s impact on popular products like the iPhone and iPad. The shortage is not impacting the high-powered processors that are manufactured by Apple, but rather the smaller chips that execute functions such as decoding audio or powering mobile displays. Tim warns that supply shortages will have an effect on sales, and even industry titans like Apple are vulnerable. 

The Impact on Litigation

While this semiconductor shortage has yet to manifest itself in the form of significant litigation, we do expect disputes to arise as a result of the supply shock. Manufacturers are struggling to locate the components that they need at a price they can afford, and this challenge leaves suppliers susceptible to litigation.  

Among anticipated areas of litigation, are payment delays and contract disputes. With many experts predicting that supply will be impacted until 2022, we will undoubtedly see companies using force majeure, price escalation, termination, and other contract terms to mitigate the damage done by the supply shortage.  

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