#45 – Inside Our Industry – How a Chip Shortage Snarled Everything From Phones to Cars

Posted on | Inside Our Industry

Every day we are seeing more notices that production is being slowed or halted for everything from automobiles to smart phones and computers, all due to a shortage of a “chip”. When will chip production catch up to demand?

How a Chip Shortage Snarled Everything From Phones to Cars
Bloomberg.com  |  Ian King, Debby Wu and Demetrios Pogkas  |  March 28, 2021

A six-decade-old invention, the lowly chip, has gone from little-understood workhorse in powerful computers to the most crucial and expensive component under the hood of modern-day gadgets.

That explosion in demand—unexpectedly goosed during the Covid-19 pandemic for certain industries like smartphones and PCs—has caused a near-term supply shock triggering an unprecedented global shortage.

In February, lead times—the duration between when an order for a chip is placed and when it actually gets filled—stretched to 15 weeks on average for the first time since data collection started in 2017, according to industry distributor data from Susquehanna Financial Group. Lead times for Broadcom Inc.—a barometer for the industry because of its involvement across the supply chain—extended to 22.2 weeks, up from 12.2 weeks in February 2020.

The crunch has sideswiped the General Motors and Volkswagens of the world and swung politicians from Washington to Beijing into crisis control. It’s also catapulted Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. to the top of investor and government agendas. Asia’s two largest chipmakers are responsible for making the vast majority of the world’s most advanced silicon, yet don’t have the capacity to sate all demand. It’s a bottleneck that could last several quarters—or into next year.

A Pandemic that Reshaped Demand

Overall demand for semiconductors of all stripes—from basic microcontrollers and memory chips to the most sophisticated high-performance processors—has grown over the past decade, as smartphone usage and computing power boomed. A steady rise in semiconductor sales faltered in 2019 but was then boosted 5.4% by 2020’s shelter-in-place demand for home gadgets, IDC data shows.

At the same time, once largely mechanical machines like cars have become smarter, entailing the use of many more chips. Automotive electronics, which may include everything from displays to in-car systems, are set to account for an estimated 45% of a car’s manufacturing cost by 2030, according to a Deloitte report. The cost of the semiconductor-based components used in those electronics is estimated to jump to $600 by 2030 from $475 in 2020.

Modern cars are relying more on electronics that include semiconductors.

Uncertainties caused by the pandemic also led to sharp swings in orders last year, which in turn muddied the waters for chipmakers trying to match capacity with demand. That’s why carmakers have had to halt production in 2021 and why Playstations and Xboxes are getting harder to find in stores.

Carmakers got hit first in part because of poor inventory planning. The industry underestimated vehicle consumption and thus the amount of chips they needed when the pandemic hit. They are now expected to miss out on $61 billion of sales this year alone.

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