Learn Italian: Mi pare che il malfunzionamento sia grave. - It seems to me that the malfunction is serious.

It is an impersonal construction. The verb parere (to seem) is used in the fixed third-person singular form, and it introduces a dependent clause starting with che. In this structure, the grammatical subject doing the seeming is the entire concept that follows.

How would this sentence look if it used a personal construction instead?

You would make il malfunzionamento the direct subject of the verb parere. The sentence would simply be Il malfunzionamento mi pare grave. Notice that by using the personal construction, we get rid of che and no longer need the subjunctive verb sia.

Why do we need the subjunctive sia instead of the indicative è?

Impersonal expressions of opinion, like mi pare che or mi sembra che, trigger the subjunctive mood in the dependent clause because they express a subjective viewpoint rather than an objective fact.

Can I use sembra instead of pare here?

Yes, mi sembra che is perfectly interchangeable with mi pare che in this sentence. Parere and sembrare are synonyms when used to mean 'to seem' or 'to appear,' though parere is sometimes slightly more common in certain regional dialects or formal registers.