Silicon chips are undoubtedly part of the machinery that makes the world go round, but in 2020 a combination of factors put the entire chip industry in trouble.
With Covid-19 rearing its ugly head and wreaking havoc, much of the world has closed its doors, but the coronavirus is not the only reason for the problems that have followed.
Poor planning was a major factor, as was competition between specific industries to get the chipmakers' attention, and even natural disasters had a role to play; In short, the global chip shortage is even more complex than you might think.
Primary factors
Looking back, it's impossible to pinpoint one or two reasons for the chip shortage, as it was a whirlwind of problems that happened at the wrong time.
But to begin with, there was a lack of incentives for silicon chip makers to build enough foundries to satisfy automakers and others, says Mario Morales, vice president of the semiconductor group program at the company, analyst firm IDC . Morales says no one is investing in "legacy technology" which, while outdated, still plays an important role in many industries.
During the pandemic, original equipment manufacturers (OEMs) in the auto industry "cancelled orders for much of the supply chain," he explained. “Many disgruntled vendors found other markets that were still doing well despite the pandemic. "
But the problems can be traced further. In the fall of 2018, for example, the United States imposed trade sanctions on China. This prompted Huawei, one of China's largest smartphone makers, to place large orders for chips before the sanctions were implemented. Apple and others followed suit in an effort not to be left behind, then the pandemic began.
Not surprisingly, pandemic crashes have played a role in silicon shortages, but they have affected other areas as well. Almost everything that has a battery or connects to a wall uses chip-based technology.
For example, the demand for cloud computing services has exploded as many consumers have started buying products that they would not normally need to work from home, and so have many businesses.
Smartphones remain the world's most popular electronic product, so demand has remained high and crypto enthusiasts and entrepreneurs have taken over graphics processing units (GPUs).
What other factors have contributed to the global chip shortage?
Several other underlying factors have also contributed to chip shortages, and the complexity of things like semiconductors is also a major factor.
According to Craig Barrett, the former head of Intel, the company's microprocessors are the most complicated devices ever made by humans. The process is so delicate that the rooms where the semiconductors are built are cleaner than hospital operating rooms. In an operating room, they allow 10.000 air pollution particles per cubic meter of air. In a room where a semiconductor is built, they only allow 10 for every cubic meter.
So making silicon chips is not easy, but the people who make it are talented and backed by great resources. So what is the real problem?
Whether it is easy or difficult to build a semiconductor, the point is that the process is billions of dollars and time consuming. And if you mess up the process one bit, chances are you'll lose to another manufacturer.
It takes about three months to make a chip from start to finish and involves million dollar machines. There is also molten metal and lasers involved as it takes a wafer of silicon and turns it into a transistor to power your computer, smartphone, or other smart device.
Finally, several factors beyond the control of the semiconductor industry also played a role. Power outages in Texas, where most chip manufacturing takes place in the United States, and drought in Taiwan, also contributed to the shortages.
The world's largest chipmaker, TSMC, has also had to reduce water consumption (essential for chip production) due to government orders. Taiwan accounts for more than 60% of total chip foundry revenue globally, and the country has been unable to maintain its regular production.
What sectors are the most affected?
Automakers have been virtually paralyzed for more than a year and the situation could get worse. A new Covid epidemic in Southeast Asia, where the majority of American automakers' chips are made, could further affect the industry next year.
Production in countries such as Vietnam, the Philippines and Malaysia has been halted due to the outbreak, but American automakers rely heavily on these countries to keep their production lines moving, as local factories do not account for 12,5 % of chip manufacturing.
Another industry that is suffering is the manufacturing of consumer electronics. For example, Hon Hai Precision Industry, an Apple supplier, said that about 10% of its shipments would be affected. Xiaomi, meanwhile, said its smartphones would experience a price hike due to global chip shortages.
Apple's MacBook and iPad products also encountered production issues, and in March Samsung announced that its new Galaxy Note would be delayed indefinitely.
The latest data shows that smartphone sales have dropped 6% year-over-year, and that's because production has stagnated and, in some cases, stopped. On top of that, chipmakers are raising prices to avoid oversupply, and it remains to be seen if that influences the price of smartphones next year.
Smartphone makers like Samsung and Apple dodged the first bullet of the microchip shortage, having seen what was happening long before the auto industry, although there are still some problems.
However, the auto industry and others are catching up. Syed Alem, Accenture's global head of semiconductors, said: “Smartphone companies have benefited from the extra capacity left behind by auto companies, which has led the auto industry to experience a shortage of chips when demand for cars grew faster than expected. "
“Now that the auto industry and others are catching up and starting to regain the capacity they left behind, the competition for semiconductor supplies is fierce. This created a supply pressure for smartphone chips.
Due to stifled demand and improving consumer prospects, the first quarter of 2021 saw global smartphone sales increase by 26%. However, chipmakers cannot keep up with demand and that is unlikely to change by the end of the year.
Price impact
Along with the possible rise in smartphone prices, several other products have become more expensive due to shortages.
GPU and CPU prices have skyrocketed since the onset of the global chip shortage, with the latter reaching around 50% above MSRP in most markets, according to some experts.
Between March and May 2021 alone, the price of GPUs increased by 14%, with Nvidia's RTX 3060 and RTX 3080 GPUs sold at four times their MSRP and the RX 6700 XT or RX 6900 XTs at twice the MSRP.
Three main factors have contributed to the rise in GPU and CPU prices: resellers, supply chain issues, and hard-hitting resellers.
We've covered price increases before, but for many manufacturers, there is another reason to do so - they want to prevent resellers from buying GPUs at MSRP and then undermining the market.
While they do not control the prices of CPUs and GPUs, the distributors more or less force the retailers to buy batches of products. Simply put, they tell retailers that a particular processor or GPU is only available if they buy X, Y, and Z with it. In turn, retailers are raising the price of the GPU or CPU to compensate for the additional products they had to pay for just to get the GPU / CPU they need. Or you'll see retailers trying to sell packages when customers don't need anything like that - a trickle-down effect that doesn't help the current chip shortage situation.
However, there is more. Manufacturing plants (fabs) have a limited number of chips that they can manufacture and supply. Samsung and Taiwan Semiconductor Manufacturing Company (TSMC), which supply Nvidia and Advanced Micro Devices (AMD) respectively, are no longer able to produce GPUs. Additionally, there are persistent problems with substrates, raw materials, GDDR memory, and components. This is also the reason why the price of GPUs has increased more dramatically than that of CPUs.
Black Friday and Christmas
The holidays are fast approaching and the global flea shortage will play a role. You can't accurately predict what will happen to the products for Black Friday, but there are strategies you can follow to mitigate the problems.
Since Covid-19 is still prevalent in Southeast Asia, where many products are made, you can expect the shelves to be emptier compared to previous years. You can also expect prices to keep rising for just about everything due to a lack of labor, a shortage of supplies, and longer shipping times.
Commentators also predict that the price of merchandise will continue to rise through the end of 2021, and that typical Black Friday sales and promotions will decline at many retailers.
Christmas is likely to take a hit as well, as retailers face problems storing shelves with children's toys, especially those with microchips. According to Sky Castle Toys CEO Lev Nelson, in addition to the chip shortage itself, toy makers are often pushed to the back of the semiconductor line by higher-margin items like cars, smartphones, and washing machines.
To avoid experiencing price increases on or before Black Friday and Christmas, you should start shopping now. The sooner the better, especially for anything that uses a silicon chip.
What other products are affected?
According to Goldman Sachs, the global chip shortage has affected 169 different industries. Any industry that spends at least 1% of its GDP on semiconductor chips is affected, with the automobile...