Don't let AI chip off the old block

Ever-increasing demand from AI data centres is throttling the supply of memory chips across a range of industries from cars to consumer electronics. The auto industry is redesigning its electronics architecture as soaring chip prices are inflating component costs and threatening production lines. Apple, Microsoft and Sony have announced steep price hikes for some of their best-selling products. Makers of laptops and mobile handsets are reconfiguring devices to offer less memory or storage. Some product categories that operate on wafer-thin margins are likely to be discontinued. Shortage in memory chips is expected to last for a couple of years till fresh capacity comes on stream. Apart from high initial costs of setting up a chip factory, the industry is also dealing with scarce supply of machinery and materials.

Unlike Covid disruptions-created chip shortage, this is a structural crisis. Chipmakers are switching away from consumer-grade memory to the more intensive version used in AI infra. Every high-end chip displaces more than one of the regular memory and storage chips manufacturers like Samsung, SK Hynix and Micron were producing till fairly recently. Record chipmaker profits have led to impressive expansion plans, but factories won't deliver relief immediately. There is also a likelihood of disinvestment in the broader technology market facing 'chipflation' and cooling consumer demand.

The total computing power of AI chips is doubling roughly every 7 mths. Shortage for the non-AI chip market is, thus, growing exponentially. Arresting it will require bringing a larger pool of chip supply from countries like China, which will trigger strategic concerns. Countries like the US and India restrict use of Chinese chips in critical infrastructure. There is an opportunity for India to accelerate its semiconductor manufacturing ambitions within the constraints of upstream supply bottlenecks. India's recent achievements in export of electronics, however, face a mounting hurdle that is chipping away at global consumer demand.