A close-up of a CPU socket and motherboard lying on the table.
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A chip shortage that started when consumers stocked up on PCs and other electronics during the Covid-19 pandemic is now threatening to disrupt auto production around the world.
On Tuesday, GM announced that it would extend production cuts in the US, Canada and Mexico through mid-March. They join a long list of major automakers, including Ford, Honda and Fiat Chrysler, who have warned investors or slowed vehicle production because of the shortage of chips.
But it’s not just the automotive industry that has problems getting enough semiconductors to build its products. AMD and Qualcomm, which sell chips to most of the leading electronics companies, have noticed the shortage in the past few weeks. Sony blamed the shortage of chips that made it so difficult to get a PlayStation 5 game console.
Chips are likely to remain scarce in the months ahead as demand remains higher than ever. The Semiconductor Industry Association announced in December that global chip sales will grow 8.4% in 2021 from the total of $ 433 billion in 2020. That’s 5.1% growth between 2019 and 2020 – a remarkable jump considering the size of the absolute numbers.
Semiconductors are in short supply due to the strong demand for electronics, the shift in business models in the semiconductor world that created a bottleneck in outsourced chip factories, and the impact of the US trade war with China that began under former President Trump.
A big boom in electronics sales
The Covid-19 pandemic has spurred demand for consumer electronics.
The first wave affected people who bought PCs, monitors, and other devices to work remotely or to go to school. Then, last fall, home entertainment devices like game consoles, televisions, smartphones and tablets flew off the shelves.
Living room with a Sony PlayStation 5 home video game console and DualSense controller next to a TV, captured on November 3, 2020.
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According to Gartner data, PC sales rose 4.8% to 275 million units in 2020, with growth of over 10% during the holiday season. This reversed a year-long decline and is the highest annual growth in the PC market since 2010.
Other devices also sold well. The Consumer Tech Association, an American trading group, said 2020 was the biggest year on record with retail sales of nearly $ 442 billion and is forecast to see great demand for game consoles, headphones, and smart home products in 2021.
All of these devices contain a ton of chips – not just the central processor, which can cost tens or hundreds of dollars, but also cheaper, small chips to control the display, manage power, or run a 5G modem.
“The current chip shortage begins with the unprecedented demand for personal computers and peripherals as the globe worked from home and attended school,” said Patrick Moorhead, founder of Moor Insights, a company that studies the semiconductor industry.
Electronics giants who reported record sales say they could have been even better if there had been enough supply. Apple, which recently posted a quarter of $ 111 billion, told analysts that there was insufficient supply of new iPhones to meet demand. CEO Tim Cook told Reuters that “semiconductors are very tight”.
Lisa Su, CEO of AMD, which is making the processor the focus of new consoles from Sony and Microsoft, said last month that bottlenecks could be expected at least in the first half of the year. “The industry needs to increase overall capacity,” said Su.
Business relocation to outsourcing slam factories
The shortage shows a structural change in the semiconductor industry. Many of the leading semiconductor companies are now “fabless,” meaning they only design the chips and the technology within them. Other companies, so-called foundries, are largely tasked with actually manufacturing the chips.
The foundries are run by companies like TSMC in Taiwan or Samsung in South Korea – and it turned out they were already making chips as quickly as possible. If a company cut jobs in the early days of the pandemic, it had to go back in time.
Automakers do not compete directly with high-tech companies for the same chip supply. Auto chips are usually based on older chip manufacturing technologies and do not require an upgrade.
The Ford company logo will appear on a sign outside the Chicago assembly plant in Chicago, Illinois on February 3, 2021.
Scott Olson | Getty Images
But the lack is not just due to the fastest chips, but to everything.
“The shortage in the semiconductor industry is consistently great,” said Qualcomm’s new CEO Cristiano Amon last month. “Not just leading nodes, but also legacy nodes,” referring to chip manufacturing technology.
Cars now contain dozens of tiny chips, many of which perform functions such as power management. Cars also use many microcontrollers that can control traditional automotive tasks like power steering or that are the brains at the heart of an infotainment system. Automakers also typically use “just-in-time” production, which means they don’t have to stock additional parts.
“The problem is, you can’t sell your $ 30,000 car without that 10-cent chip,” said Gaurav Gupta, a semiconductor analyst at Gartner.
“If the chip that powers the car dials or automatic braking is delayed, so will the rest of the vehicle,” Bryce Johnstone, automotive director of marketing at chip designer Imagination Technologies, previously told CNBC.
Now the automotive industry is realizing that this is a lower priority than the electronics companies in the foundries. In 2020, only 3% of TSMC’s sales were automotive chips, compared to 48% for smartphones.
Tech companies are “the volume people. They have higher margins. And they never cut their orders and have long-term contracts with the foundries,” Gupta said. “Now that this automatic demand has peaked faster than OEMs anticipated, cars can’t get back in line.”
The foundries are aware of the problem. TSMC, considered the most advanced and important foundry, said it was trying to help auto companies and that it would spend up to $ 28 billion this year to increase its capacity.
“While our capacity is at full capacity with demand from all sectors, TSMC is reallocating our wafer capacity to support the global automotive industry,” TSMC said in a January statement.
Automakers also use automotive-grade chips that are carefully “qualified” against industry standard binders to ensure they are durable and reliable. “It is more difficult for the industry to alternatively relocate their production lines and supply chains,” Trendforce, an advisory group for the semiconductor industry, wrote in a report last month.
Trump’s trade war
Last year, the United States placed restrictions on Semiconductor Manufacturing International (SMIC), the largest foundry in China. Customers have had to shift their orders to competitors like TSMC, Gupta said.
SMIC executives admitted the US move prevented the use of their full capacity when they said geopolitical factors would prevent them from taking advantage of “this year’s rare market opportunity,” indicating chip shortages.
Some companies have also decided to store key chips before the US deadline and use up production capacity last year. For example, Huawei was storing critical radio chips before the sanctions, reported Bloomberg News.
Supplies were also fueled by supply concerns when Covid took over the world. SK Hynix, a major manufacturer of memory chips, announced an increase in sales in July last year, driven by “growing concerns about the IT supply chain in general”.
Some companies that have chips in stock are now enjoying the benefits. Toyota said Wednesday that it did not expect to cut its production rate since it had been storing four months’ worth of chips to address the shortage. Toyota increased its profit guidance for the full year by 54%.