Global chip shortage spirals beyond cars to phones and game consoles

Chip shortages are expected to wipe out US$61 billion of sales for automakers alone.
Chip shortages are expected to wipe out US$61 billion of sales for automakers alone.PHOTO: REUTERS

TOKYO (BLOOMBERG) - The first hints of trouble emerged in the spring of 2020. The world was in the early throes of a mysterious pandemic, which first obliterated demand then super-charged Internet and mobile computing when economies regained their footing.

That about-face - in a span of months - laid the seeds for potentially the most serious shortage in years of the semiconductors that lie at the heart of everything from smartphones to cars and TVs.

Auto and electronics makers that cut back drastically in the early days of the outbreak are now rushing to re-up orders, only to get turned away because chipmakers are stretched to the max supplying smartphone giants like Apple

Last week, Qualcomm's Cristiano Amon, head of the world's largest mobile chipmaker, flagged shortages "across the board", citing the industry's reliance on just a handful of players in Asia.

Mr Amon joined a growing chorus of industry leaders warning in recent weeks that they can't get enough chips to make their products

Carmakers appear in direst straits and have spurred the United States and German governments to come to their aid - General Motors this week was forced to mothball three North American plants and Ford Motor is bracing for a 20 per cent drop in near-term output.

But more industries have lately copped to shortages, emphasising how Covid-19 and a boom in a new breed of 5G-ready smartphones like the iPhone 12 is exacerbating a shortage of capacity plaguing the entire consumer industry.

Chip shortages are expected to wipe out US$61 billion (S$81.4 billion) of sales for automakers alone, but the hit to the much larger electronics industry - while tough to quantify at this early stage - could be far larger.

Apple, a major Qualcomm customer, said recently that sales of some new high-end iPhones were hemmed in by a shortage of components. Europe's NXP Semiconductors and Infineon Technologies - whose roles near the top of the supply chain grant them visibility over global chip flows - have both indicated the constraints are no longer confined to autos. And Sony said last Wednesday (Feb 3) it might be unable to fully sate demand for its new gaming console in 2021 because of production bottlenecks.

"The virus pandemic, social distancing in factories, and soaring competition from tablets, laptops and electric cars are causing some of the toughest conditions for smartphone component supply in many years," said Mr Neil Mawston, an analyst with Strategy Analytics. He estimates prices for key smartphone components including chipsets and displays have risen as much as 15 per cent in the past three to six months.

PC makers were among the first to hint, in the spring of 2020, at an impending crunch, a warning echoed by Lenovo Group last Wednesday.

At the heart of the crisis sits Taiwan and its largest company Taiwan Semiconductor Manufacturing Co (TSMC), the chipmaker of choice to the world's technology and auto giants. It spent billions in past years ensuring it remains at the forefront of semiconductor production technology - a costly exercise that's both paid off and also thrust it into the middle of a global geopolitical dogfight.

Last Friday, Qualcomm and Corning joined Biden administration officials to discuss the gathering storm with their Taiwanese counterparts and the island's top industry representatives including TSMC. Both sides repeatedly stressed their interdependence, Taiwan's Minister of Economic Affairs Wang Mei-Hua told reporters. The presence of several senior US officials and the Semiconductor Industry Association - which represents America's biggest chipmakers - emphasised the urgency of the situation.

The current crisis stems from several factors that converged last year. Like most every chip designer on the planet, Qualcomm outsources production to Asian companies, foremost among which are TSMC and Samsung Electronics. The pair are increasingly the only recourse for producing the most advanced semiconductors. But their capacity takes years to plan and billions of dollars to build in tandem with customers, and the post-Covid-19 5G phone and Internet boom took their clients by surprise.

Industry executives also blame excessive stockpiling, which began over the summer when Huawei Technologies - a major smartphone and networking gear maker - began hoarding components to ensure its survival from crippling US sanctions. Led by Huawei, Chinese imports of chips of all kinds climbed to almost US$380 billion in 2020 - making up almost a fifth of the country's overall imports for the year.

Rivals including Apple, worried about their own caches, responded in kind. At the same time, the stay-at-home era spurred sales of home appliances from the costliest TVs to the lowliest air purifiers, all of which now come with smart, customized chips. TSMC executives said on its two most recent earnings calls that customers have been accumulating more inventory than normal to hedge against uncertainties, a manoeuvre they see persisting for some time.

"There's a chip stockpiling arms race," said Mr Will Bright, co-founder and chief product officer at Drop, which uses custom chips in headphones and keyboards.

All that has dried up the spigot for smaller-volume buyers such as the makers of cars and gaming consoles: Nintendo, Sony and Microsoft have struggled to make enough Switches, PlayStations and Xboxes for about a year. The game hardware industry is bracing for supply to get worse before it gets better in 2021, potentially even affecting the next holiday season, people familiar with the matter say.

It didn't help that automakers - the most visible cohort to be affected - misjudged the situation. Some industry observers blame their predicament on near-sighted planning and under-estimation of a post-Covid-19 rebound in auto demand. Others argue chipmakers are prioritising higher-volume and more lucrative consumer electronics such as smartphones.

Last Friday, Minebea Mitsumi - a vital supplier to the transport and electronics industries - suggested shortages may plague even more sectors, including aviation. "Demand is springing up everywhere at a faster-than-expected pace," CEO Yoshihisa Kainuma told analysts on a call. "Airlines around the world are scrapping old aircraft to slim down their balance sheet. And people's desire to travel will explode after the pandemic."

It's anybody's guess when production will catch up with demand. But a growing number of industry observers don't see quick or simple resolution.

"A lot of it can be traced back to the second quarter of last year, when the whole world basically shut down. Many auto companies shut down manufacturing and their suppliers re-prioritised," said Mr Mario Morales, an analyst with IDC. "Not until the second half will we see relief for some of these markets."