Chipmakers are resorting to increasingly desperate measures to keep up with the voracious demand of consumers as the semiconductor crunch enters its second year. That includes foregoing quality assurance tests and taking deliveries of potentially faulty equipment weeks in advance just to squeeze out every last processor they can get.

The seeds of the shortage, now entering its second year, were sown in the latter half of 2020, when a stimulus-fueled recovery worldwide saw consumers snap up everything from passenger cars to Sony PlayStations. Supply of advanced silicon circuits is broadly inflexible due to the complex manufacturing process involved: It can take years to build new capacity from scratch, making it difficult to keep pace when demand is so volatile.

Now the world's leading supplier to the chip industry says its clients are starting to take shortcuts, foregoing the usual barrage of quality assurance tests to which they subject his exorbitantly-priced semiconductor equipment in order to save precious time and money—even if it risks problems arising later.

“Our customers are in bad need of extra capacity,” said Peter Wennink, chief executive of ASML Holdings after reported annual results on January 19. “I think it’s unprecedented. I have never seen this before.”

Only atoms in width

Global sales of chips today are booming, according to the Semiconductor Industry Association. Cumulative shipments through the first 11 months of last year reached 1.05 trillion microchips, already marking a new annual record with one month of sales still left to be tabulated. The total value of semiconductors sold across the world, according to SIA's estimates, came just shy of breaching the $50 billion mark in the month of November.

Even though this already represented a 24% year-on-year increase over November 2020, far more chips are actually needed just to maintain the blistering pace of global growth. On January 19, Toyota, one of the few carmakers that coped best with the shortage, warned billions of dollars worth of merchandise would not be built as planned, after a lack of semiconductors forced it to slash its production plans for February.

Building a microchip is far more difficult than building a Toyota, however. Semiconductors are manufactured in enormous fabrication plants that cost companies billions of dollars in upfront capital and take years to build. At the heart of these "fabs" are clean rooms that employ photolithography machines, which etch miniature circuitry sometimes only a few atoms in width onto silicon wafers in a painstaking process requiring weeks to complete.

Since a single dust particle can destroy millions of transistors on a wafer, workers wear bunny suits that cover their whole body to ensure not so much as a hair lands in ASML's sensitive equipment. Temperature and humidity must be kept constant in a clean room, and even the air descends to the floor in a controlled manner where it is repeatedly filtered and recycled.

The process is so complex and capital intensive that entire swathes of the industry decided to go "fab-less". These chip suppliers, such as Advanced Micro Devices, focus on their expertise in chip design and outsource some if not all of their production to specialist manufacturers called foundries mainly located in Asia.

Sole supplier

When consumers—either flush from stimulus checks or capitalizing on government tax breaks—ramped up their purchases, these Asia foundries were overwhelmed. To address the ensuing crunch, companies such as Taiwan Semiconductor Manufacturing Company (TSMC) have been busy bulking up on new equipment.

At the top of their list are Wennink's latest machines, such as the extreme ultra-violet photolithography systems. ASML is the sole supplier of EUV technology needed to print 5 nanometer transistors like those found in Apple's vaunted M1 processor. No other company in the world has proven capable of mastering the complexity of these devices, and the U.S. government has intervened to ban their export to China.

Since ASML's equipment can typically run in the tens or even hundreds of millions of dollars depending on the machine, customers prefer to run tests in the Netherlands that can last anywhere from two weeks to a full month before these are packed up and delivered to their final destination.

Yet with so much of the economy riding on their every move, Wennink said chipmakers no longer have the patience, desire or luxury to wait for the entire gamut of tests to be performed.

"We actually skip that and we ship the system to the customer’s site, which actually means there is only one acceptance test," he explained. "It’s all about getting wafers out there. More wafer output."

While chipmakers may be dependent on Europe for its photolithography machines, Europe is dependent on Asia for its supply of semiconductors — and Taiwan in particular.

To mitigate this strategic weakness, the European Commission on January 20 said it would unveil a new chips act for the 27-member EU bloc in February. Its five strategic pillars, including loosening otherwise strict rules around government subsidies, is designed to increase the share of chips manufactured in Europe from 10% to 20% of the world’s supply by 2030.

“Keep in mind that the world’s production itself will double (by the end of this decade),” EU Commission President Ursula von der Leyen told the World Economic Forum on January 20. In order to hike its share of the market amid an already growing market then, she said, "this means quadrupling today’s European production.”