In a matter of months the global semiconductor shortage has hobbled the auto industry and threatened Silicon Valley revenues.

Cisco CEO Chuck Robbins this week said the company is experiencing the strongest demand in nearly a decade but supply chain challenges, spurred by the chip shortage, were spoiling what would otherwise have been a stellar quarter. The company now expects the supply chain challenges to extend through 2021.

And Cisco isn’t alone. Arista Networks earlier this month blamed the chip shortage for extending product lead times by as much as a year.

The major foundry operators have responded in kind, moving quickly to expand manufacturing capacities, and a group of U.S. senators proposed $52 billion in funding to help bolster domestic chip production, but the question remains: how long will this shortage last?

The short answer to that question is years, but a closer look reveals it isn't that simple.

When the semiconductor shortage will end depends on a couple factors: supply, demand, and what you’re trying to make, explained Darshan Naik, EVP at consulting firm Capgemini.

On the surface, the chip shortage might seem like your classic supply-demand mismatch. But in this case, the foundries that actually make the chips don’t have enough capacity to keep up with growing demand.

As a result, Taiwan Semiconductor Manufacturing Co. (TSMC), Samsung Electronics, and Intel — the three largest semiconductor manufacturers — have all announced new foundry operations.

TSMC is planning to invest more than $100 billion over the next few years to build out its foundry capacity. Intel, which earlier this year opened its foundries to contract manufacturing, has committed $23.5 billion in spending for two Arizona chip fabs and a New Mexico modernization effort.

These investments will eventually increase overall semiconductor capacity, but not for a while. “It's not like you can flip a switch and put up a new plant and start making chips,” Naik said.

TSMC’s $12 billion Arizona chip fab, announced in spring 2020, won’t come online until 2024 at the earliest. What’s more, it appears that all of the chip fabs announced by TSMC, Samsung, and Intel will be leading-edge foundries, producing chips ranging from 7-nanometers down to 3-nanometers.

This is good news for companies making high-tech electronics like servers, smartphones, or laptops, but a real problem for many companies that rely on a steady supply of chips built on older, cheaper process nodes, Naik explained.

This is where the semiconductor shortage gets a bit more complicated, because it’s not just about foundry capacity, it’s about the right foundry capacity for the job.

Not everything needs leading-edge silicon, Naik said. In large part, “the challenge has been in the low margin, lower end of the spectrum, which is what’s used in the automotive and some of the other industry spectrums,” he added.

Most advanced chips used worldwide are built using either 28-nanometer or 40-nanometer processes, according to a recent Analysys Mason report.

The foundry business is also inherently capital intensive and low margin. While leading-edge silicon tends to be a high demand, high volume business, which helps to offset tight margins, older process nodes are not, Naik said, adding that this is why it's still possible to buy an iPhone or a computer while automakers have been forced to shutter their plants.

This hasn't been a problem in the past because while automakers don't necessarily order high volumes of these chips, those orders are fairly consistent, according to Supplyframe CMO Richard Barnett.

Many automakers began ramping down the production of passenger vehicles during the pandemic. “They were expecting a 50% ramp down, and they thought that that would extend into maybe Q2 or Q3 of at least this year, 2021,” he said in an earlier interview.

But when the economy began to recover and automakers started ramping up production again, they ran into a problem. The semiconductor capacity carmakers have come to rely on was no longer there, eaten up by competing industries.

“In that 20-nanometer-plus [range] the demand is way surpassing the supply,” Naik said.

Making matters worse for automakers, as cars and trucks increasingly incorporate things like infotainment or autonomous driving capabilities, the amount of silicon required is growing, he added. “The electronic content in a car, which is right now $12 to $15 … from a cost standpoint, is shifting to $500 to $600. That is just sheer monstrous capacity increase.”

China’s burgeoning semiconductor industry could help offset some of this demand, according to Caroline Gabriel, research director at Analysys Mason.

Chinese foundry Semiconductor Manufacturing International Co. (SMIC) is currently ramping production of 28-nanometer parts.

“The main Chinese foundries, SMIC and Hua Hong Semiconductor, are expected to achieve self-sufficiency in the 28-nanometer process technology this year,” she wrote. “This is now implemented at mass scale and China is poised to activate its first homegrown 28-nanometer lithography machine this year.”

Unfortunately for U.S. companies looking to take advantage of China’s growing semiconductor capacity, a trade war between the two countries and growing national security concerns could limit access.

Automakers' reliance on just-in-time manufacturing, where just enough components are sourced to build a vehicle, has also exacerbated the shortage, Naik explained. This, he added, makes it harder for automakers to secure foundry capacity, especially for the kind of low margin, low volume chips used in things like engine control unit

Companies like Apple, which rely on long lead times and multi-year semiconductor commitments, haven't been impacted by the shortage, he said. “[The automakers] are not used to this idea of pre-buying capacity.”

While foundry operators won't be able to bring additional capacity online for years, automakers could mitigate some of the supply challenges by making larger commitments up front, Naik said. It's the only near-term option, he said, adding that foundries will likely provide the necessary capacity if automakers increase commitments.