CHIPS AWAY: SEMICONDUCTOR SHORTAGE WREAKING HAVOC IN TECH
SEMICONDUCTOR SHORTAGE WREAKING HAVOC IN TECH
As Samsung Electronics warns that it’s grappling with the fallout of a “serious imbalance” in semiconductors, the technology world could be about to enter its own ‘lockdown’. From the PlayStation 5 to the new Tesla Model S, virtually every device maker could be forced to temporarily halt production, caught off guard and causing delays to 2021 product pipelines.
THE GREAT 2021 CHIP SHORTAGE
Though Samsung might be one of the world’s largest makers of chips and consumer electronics, the company was the latest to voice concerns in its latest business quarter update, where co-Chief Executive Officer Koh Dong-jin revealed that the company was even contemplating skipping the release of its Samsung Galaxy Note to streamline its lineup. Some of the biggest players in semiconductors, including Continental AG and Renesas Electronics Corp, have recently warned of longer-than-usual delays due to growing demand for electronics in the midst of the COVID-19 pandemic. As consumers spend more time indoors, more are upgrading their devices, replacing their TVs, and considering new automobiles to spend their cash in lieu of vacations and experiences. It is true that pursestrings have been tightened, but companies such as Apple reported record growth in 2020; in the quarter to June 2020, Apple posted revenues of $59.7 billion, up by more than 11% from the year-ago quarter; its iPhone 12 proved incredibly successful, too.
But as chip supplies run dry, there’s a genuine risk that companies struggle to fulfill demand and we see a backlog of products entering the
market, impacting virtually every sector. Even auto manufacturers such as Volkswagen AG are impacted, with the company claiming it’s lost production on over 100,000 cars worldwide as a result of semiconductor shortages.
In the United States, the silicon shortage combined with extreme weather has led to a drop in production for Toyota Motor Corp and Honda Motor Co, with the companies now confident that the shortage will disrupt the much larger electronics industry. Speaking to Bloomberg, Samsung’s -Chief Executive Officer Koh Dong said that there’s a “serious imbalance in supply and demand of chips in the IT sector globally,” adding that, “Despite the difficult environment, our business leaders are meeting partners overseas to solve these problems. It’s hard to say the shortage issue has been solved 100%,” with some estimating several months of disruption. MS Hwang, an analyst at Samsung Securities, added that tightened supply is affecting everyone except Apple right now, and revealed PCs will be hit because of the short supply of display driver ICs. The profitability of the TV sector will also be affected by soaring LCD prices, which will have a knock-on effect on pricing and consumer inflation.
UNDERSTANDING THE SHORTAGE
As a consumer, it’s easy to see the news of a global semiconductor shortage and ask “why don’t they just manufacture more?” unfortunately, it’s not that easy. Unlike car engines, for example, chips must be built in factories with highly-controlled environments, called fabs. If specks of dust enter the factory or the temperature spikes, it can damage
the workings of the conductors and mean they have to be scrapped. Being able to meet the unexpected rise in demand isn’t quite as straightforward as opening another plant or taking on a few additional staff members - chip fabs require billions of dollars in investment and can take years to build. According to the latest data, fabs are running at maximum capacity around the world, and it’ll take years before another one can come online and fill the extra demand for new electronics.
The impact of COVID-19 extends not only to the rise in consumer electronic spending but in the early days of the pandemic, where large parts of the world shut down. Economists said that consumer spending would fall overnight as people lost their jobs and stopped spending on non-essential goods, and auto brands slashed production and ordered fewer chips as a result. And with consumers forced to work at home, millions began pouring money they’d usually spend on vacations and theater tickets into new TVs, games consoles, and laptops. To help cope with demand, electronics giants invested in extra chips, and now there’s been a knock-on effect, to the point where millions of cars are sitting almost-finished, assembled but waiting for a computer chip to power their onboard entertainment and controls, costing automakers billions of dollars in lost revenue.
And it’s not just the pandemic that’s causing a shortage of semiconductors; the rise of 5G technology in recent years has also made us more chip-hungry, with phones using more chips than previous generations. According to one report, 25% of all smartphones sold last year were 5G-compatible, creating a huge strain on
chip production, whilst former President Donald Trump’s trading relationship with China also had an impact, with 10% of the world’s chips coming from a company owned by the Chinese government. Because US officials temporarily banned American companies from selling SMIC chips, companies had to invest elsewhere. Other factors include the growth in working from home, and even the rise in cryptocurrencies such as Bitcoin and Dogecoin, which encourage consumers to “mine” using a spare computer from home, as well as companies building cryptocurrency datacenters.
IMPACTING APPLE’S PRODUCTION LINE
Although it had previously been reported that the global ship shortage wouldn’t impact Apple, the truth is that the company cannot be fully insulated from the ongoing crisis. The truth is that Apple stands in a more fortunate position than other companies, as it designs and commissions its own A-series chips from TSMC, whereas Android smartphone brands use processors like Qualcomm, Samsung, HiSilicon, and MediaTek and have less control over their manufacturing or supply. Another advantage for Apple over its rivals is that the firm has an operational edge, and typically secures priority orders in advance, and negotiates Apple-only production lines to shield the company from price rises, delays, and shortages.
Whilst MS Hwang, an analyst at Samsung Securities, revealed that “the tightened supply of Qualcomm AP chips produced by TSMC is affecting everybody except Apple,” that’s not strictly true. Samsung currently makes Apple’s OLED screens, and as the drive chips for these
are made at Samsung’s Texas plant, which has been adversely affected by weather and the chip shortage, there could be a knock-on effect for the company. The site also produces chips for organic light-emitting diode panels and image sensors, which could disrupt iPhone production in the months ahead. Apple has already made production line changes in recent months, cutting iPhone 12 mini production in favor of the iPhone 12, following lower-thananticipated demand for the new smartphone with smaller screen real estate.
The truth is that, regardless of the chip challenges in the months ahead, Apple will still likely come out in a far better position than Samsung, though it could encourage the firm to further diversify its manufacturing processes and move away from third-parties such as Samsung and Qualcomm in favor of its own manufacturing facilities. Apple is already doing so in regards to the Mac range, launching new M1 Macs with custom silicon chips that outperform the competition, and by next year, the Cupertino company will have built its own modem, too. By taking over control of its manufacturing and supply, the company can reduce its reliance on third parties and overcome potential challenges in the years ahead. Demand for chips will only further increase in today’s always-on, alwaysconnected world, and with plans to launch its own augmented reality products and Apple Car, the need for a watertight supply chain has never been more vital, especially if Apple wants to retain its position as a frontrunner.
The months ahead will no doubt be challenging for the technology sector, and we’ll no doubt
see shortages in some products and price rises in others. According to MarketWatch, the shortage will continue into 2022 and encourage semiconductor firms to increase prices. In the first quarter of this year, semiconductors will climb by around 5% in price, though that could balloon as brands become increasingly impatient and decide they’re prepared to pay for faster access to chips. It’s unlikely that chip prices will skyrocket as they did in the 20172018 shortage, where the average price of benchmark memory chips rose 26-31 percent in just a couple of months, but the effects will still be felt, and at a time when the world is still grappling with the coronavirus pandemic, it’s an unfortunate situation for all.
Whether you’re on the fence about upgrading your TV, buying a new phone, or splashing out on a new car, now is the time to do so. In the months ahead, you might just have to put your name on a waiting list to access the latest technology - and pay through the nose for it, too.