What causes the chip shortage on PS5, cars and more?

A shortage of chips that began when consumers stocked up on personal computers and other electronics during the Covid-19 pandemic now threatens to disrupt automotive production around the world.

On Tuesday, GM said it would extend production cuts in the US, Canada and Mexico until mid-March. They join a long list of major automakers, including Ford, Honda and Fiat Chrysler, who have warned investors or slowed vehicle production due to the shortage of chips.

But it’s not just the automotive industry that is struggling to get enough semiconductors to build their products. AMD and Qualcomm, which sell chips to most leading electronics companies, have noticed the shortage in recent weeks. Sony blamed the shortage of chips on why it’s so difficult to get a PlayStation 5 game console.

There will likely be a shortage of chips in the coming months as demand remains higher than ever. The Semiconductor Industry Association said in December that global chip sales would grow 8.4% in 2021 from its $ 433 billion total in 2020. That’s up from 5.1% growth between 2019 and 2020 – a remarkable jump, given the large absolute numbers.

Semiconductors are scarce due to the strong demand for electronics, changing business models in the semiconductor world that created a bottleneck in outsourced chip factories, and the effects of the US trade war with China that started under former President Trump.

The Covid-19 pandemic has spurred demand for consumer electronics.

The first wave involved people buying PCs, monitors, and other equipment to work remotely or go to school. Then, last fall, home entertainment gadgets like game consoles, TVs, smartphones and tablets started flying off the shelves.

According to data from Gartner, PC sales were up 4.8% to 275 million units in 2020, with growth of more than 10% during the holiday season. That reversed a long decline and is the highest annual growth in the PC market since 2010.

Other gadgets also sold well. The Consumer Tech Association, a US trade group, said 2020 was its biggest year on record with nearly $ 442 billion in retail sales, and expects high 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 that can cost tens or hundreds of dollars, but also cheaper little chips for controlling the display, managing power, or operating a 5G modem.

“The current chip shortage all starts with the unprecedented demand for PCs and peripherals as the world worked and went to school from home,” said Patrick Moorhead, founder of Moor Insights, a company that studies the semiconductor industry.

Electronic industry giants who have reported record sales say they could have been even better if there was enough supply. Apple, which recently reported a $ 111 billion hit, told analysts it didn’t have enough supply of its new iPhones to meet demand. CEO Tim Cook told Reuters that “semiconductors are very tight.”

AMD CEO Lisa Su, who makes the processor the heart of new consoles from Sony and Microsoft, said last month that it expects shortages at least in the first half of the year. “The industry needs to increase the overall capacity level,” said Su.

The shortage indicates a structural change in the semiconductor industry. Many of the best semiconductor companies are now “fabless,” meaning they only design the chips and the technology in them. Other companies, known as foundries, are largely contracted to actually make the chips.

The foundries are run by companies like TSMC in Taiwan or Samsung in South Korea – and it turned out that they were making chips as soon as possible. In the early days of the pandemic, if a company cut orders, they had to line up again.

Car manufacturers don’t compete directly with high-tech companies for the same chip stock. Car chips are usually based on older chip manufacturing technologies and do not require the very latest.

But the shortage isn’t just in the fastest chips – it’s in everything.

“The shortage in the semiconductor industry is across the board,” Qualcomm’s new CEO Cristiano Amon said last month. “Not just leading nodes, but 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, which can control traditional car tasks such as power steering, or which are the brain at the heart of an infotainment system. Car manufacturers also typically use “just-in-time” production, which means they don’t stock additional parts.

“The problem is, even if that 10-cent chip is missing, you can’t sell your $ 30,000 car,” said Gaurav Gupta, semiconductor analyst at Gartner.

“If the chip that powers the dials in the car or the automatic braking is slowed down, so will the rest of the car,” Bryce Johnstone, director of automotive segment marketing at chip designer Imagination Technologies previously told CNBC.

Now the automotive industry realizes that it has a lower priority than the electronics companies at the foundries. In 2020, only 3% of TSMC’s sales came from automotive chips, compared to 48% for smartphones.

Technology companies are “the volume guys. They have higher margins. And they never cut their orders and have long-term contracts with the foundries,” Gupta said. “With this automatic demand peaking faster than OEMs expected, cars can no longer be queued.”

The foundries are aware of the problem. TSMC, considered the most advanced and foremost foundry, said it was trying to help the auto companies, saying it would spend as much as $ 28 billion this year to increase its capacity.

“While our capacity is fully leveraged by demand from each industry, TSMC is reallocating our wafer capacity to support the global automotive industry,” TSMC said in a statement in January.

Automakers also use automotive-grade chips, which have been painstakingly “qualified” against industry standard binders to ensure they are durable and reliable. “It is more difficult for the industry to alternatively relocate its production lines and supply chains elsewhere,” Trendforce, an advisory group dealing with the semiconductor industry, wrote in a report last month.

Last year, the US imposed restrictions on Semiconductor Manufacturing International (SMIC), the largest foundry in China, which prevented it from getting advanced chip manufacturing equipment and made it much more difficult to sell its end products to US-based companies. Customers had to shift their orders to competitors such as TSMC, Gupta said.

SMIC executives acknowledged that the US move prevented her from running her full capacity, while saying that geopolitical factors would prevent her from seizing “this year’s rare market opportunity,” referring to the chip shortage.

Some companies also decided to stock up on essential chips before the US deadline, using up production capacity last year. Huawei, for example, has stored crucial radio chips in the run-up to sanctions, Bloomberg News reported.

Stockpiles were also triggered by supply concerns as Covid flooded the world. SK Hynix, a major maker of memory chips, said last July that sales were up sharply due to “growing concerns about the IT supply chain in general.”

Some companies that have stockpiled chips are now reaping the benefits. Toyota said on Wednesday that it does not expect to slow its production rate because it had stockpiled for four months to make up for the shortage. Toyota increased its full-year earnings forecast by 54%.