All out of chips?
Apple has been forced to cut its production goals for their newest iPhone 13 model by ten million units, 11% down from ninety million (Wu 2021). General Motors third quarter sales fell by more than 30% year-over-year, and have shut down production at most of its North American factories and allocated its chips to only its most profitable vehicles (Thomas 2021). Sony CFO Hiroki Totoki said that it has been difficult for them to increase production of the PS5 amid the shortage of semiconductors and that they have not been able to meet the high levels of demand (Martinez 2021). The semiconductor shortage relentlessly continues to prove itself as one of the bigger kinks in the supply chain. How did we get here?
While many people today have associated the supply chain shortage with the ongoing COVID-19 crisis, the root of this issue actually predates the global pandemic. A part of former President Trump’s war on China introduced policies aimed at curtailing technology transfers to China. This resulted in the first big dent in the chip market. At the end of 2019, the White House banned Huawei from buying chips made with American technology and enacted rules that prohibited The Semiconductor Manufacturing International Corporation (SMIC) from using certain U.S. tools to make chips (Klayman 2021). This was a huge blow to the Chinese chip manufacturing companies, since they are heavily reliant on U.S. technology to make their chips; Jefferies Analysts estimate that half of SMIC’s equipment currently comes from U.S. suppliers (Swanson 2021). Huawei, in anticipation of the blacklist, stockpiled chips ahead of time. Rivals of Huawei and other competitors who saw the looming fate of the chip market followed suit and stockpiled chips as well.
This left other firms to look elsewhere for chips and caused manufacturing firms like Taiwan Semiconductor Manufacturing Corporation (TSMC) and GlobalFoundries to soon become overbooked. For example, an autosupplier who had been forced to switch from SMIC commented that TSMC had been unable to keep up with demand. “The systemic aspect of the crisis is giving us a headache, in some cases, we find substitution parts that could make us independent from TSMC, only to discover that the alternative wafer manufacturer has no capacity available.” TSMC, the leader in cutting edge semiconductor technology, has not only faced large demand by firms looking for an alternative chip supplier, but also labor shortages as Taiwan faced a major COVID-19 outbreak in the middle of 2021. Mike Hogan, Senior Vice President at chip GlobalFoundries says that, “The long and short of it is, demand is up about 50%. And there is no asset-intensive industry like ours that has 50% capacity lying around.” Such a dense concentration of demand has significantly impacted the market.
Yet, this shock comes only on top of steep long term rise in demand for chips. Modern technology relies on the use of significantly more semiconductors than in the past. For example, according to a Deloitte report, automotive electronics are set to account for an estimated 45% of a car’s manufacturing cost by 2030, up from 40% in 2020 and 18% in 2000. The cost of the semiconductor-based components used in those electronics is estimated to jump to $600 by 2030 from $475 in 2020. As a result, the cost of chipmaking and keeping pace with technology advancements has increased exponentially this decade. To keep up to speed, TSMC raised its envisioned capital expenditure for 2021 by as much as 63% to $28 billion, while Samsung is earmarking about $116 billion on a decade-long project to catch its Taiwanese arch-rival. On top of this, the pandemic has not been of any help. There was an explosion in demand for certain chip-heavy industries like smartphones, consoles, and personal computers during the pandemic’s early stages. More than 300 million personal computers were sold in 2020, according to market intelligence firm IDC, up from 268 million in 2019 (Thomas 2021).
In conjunction, these factors have tremendously lengthened lead times for chips, the duration between when an order is placed and when it actually gets filled. According to industry distributor data from Susquehanna Financial Group, lead times stretched to 15 weeks on average, up from 11 weeks when data was first collected in 2017 (King 2021).
Will it end any time soon? Matt Murphy, CEO of the Delaware-based chip manufacturing company Marvell, sees it extending through to the end of 2022. “Right now, every single end market for semiconductors is up simultaneously; I’ve been in this industry 27 years, I’ve never seen that happen. If it stays business as usual, and everything’s up and to the right, this is going to be a very painful period, including in 2022 for the duration of the year.” Others are more optimistic. Elon Musk recently called the semiconductor chip shortage a “short-term” problem, saying “there’s a lot of chip fabrication plants that are being built and I think we will have good capacity by next year.” Fortunately, as he says, there are many chip plants being built. Intel is investing 20 Billion in two factories in Arizona, while TSMC is putting 12 billion towards an Arizona factory and looks to invest 100 billion over the next three years towards increasing factory capacity. AMD CEO Su Lisa says that while she expects the first half of 2022 to be tight, the second half will be less severe as manufacturing capacity opens (Thomas 2021).
Reference
Klayman, Ben. Nellis, Stephen. 2021. “Trump's China tech war backfires on automakers as chips run short.” Reuters. https://www.reuters.com/article/us-autos-tech-chips-focus-idUSKBN29K0GA.
King, Ian. Wu, Debby. Pogkas, Demetrios. 2021. “Why is There a Chip Shortage?” Bloomberg. https://www.bloomberg.com/graphics/2021-semiconductors-chips-shortage/.
Thomas, Ian. 2021. “Semiconductor chip shortage could extend through 2022, Marvell CEO says.” CNBC. https://www.cnbc.com/2021/10/03/semiconductor-chip-shortage-could-extend-through-2022-marvell-ceo.html.
Wu, Debby. Apple to Cut iPhone Production Targets Due to Chip Shortage.” 2021. Bloomberg. https://www.bloomberg.com/news/articles/2021-10-12/apple-poised-to-slash-iphone-production-goals-due-to-chip-crunch?sref=ExbtjcSG.
Swanson, Ana. Zhong, Raymond. 2020. “U.S. Places Restrictions on China’s Leading Chip Maker.” nytimes.
https://www.nytimes.com/2020/09/26/technology/trump-china-smic-blacklist.html
Martinez, Phillip. 2021. “PS5 Production 'Difficult' Thanks to Supply Shortage, Says Sony.” Newsweek. https://www.newsweek.com/ps5-restock-production-difficult-sony-semiconductor-supply-shortage-1566915.