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The global chip shortage is beginning to hit the smartphone industry

A store window in Dublin, Ireland, with iPhones and Samsung Galaxy phones on display.

Artur Widak | NurPhoto | NurPhoto via Getty Images

A global shortage of computer chips has affected everything from cars to video game consoles. And smartphones look like they’s next on the list.

Semiconductors have been in short supply this year, due to a number of reasons, including factory closures as a result of the Covid-1

9 pandemic and increased demand for consumer electronics.

Car manufacturers have been particularly affected by the shortage, with companies such as General Motors and Ford reducing or even stopping the production of certain vehicles.

Video game consoles are also affected, with gamers struggling to get hold of the new Microsoft Xbox Series X and Sony PlayStation 5 systems.

Smartphones have so far largely been protected from fallout, thanks to manufacturers such as Apple and Samsung that store important components.

“The automotive industry is not moving at the same pace as the smartphone business,” Ben Wood, chief analyst at CCS Insight, told CNBC. “They saw the problems more slowly than the smartphone guys.”

Car manufacturers rely on larger, older chips while phone manufacturers use the latest processors, Wood said. Smartphones are also sold in far larger volumes than cars, making them a preferred customer of suppliers.

Meanwhile, “smartphone companies did not drop the demand for chips as the automotive sector did when they expected a drop in demand for cars” at the start of the pandemic, Syed Alam, Accenture’s global semiconductor leader, told CNBC.

“In fact, smartphone companies benefited from the extra capacity left behind by car dealerships, which led to the automotive industry experiencing a chip shortage when demand for cars increased faster than expected,” he added.

However, mobile manufacturers are now beginning to feel the effects of the global chip shortage.

“Now that the automotive sector and others are catching up and starting to regain the capacity they had given up, there is fierce competition for the supply of semiconductors,” Alam added. “This has created supply pressure for smartphone chips.”

Demand for smartphones declined in 2020 as the coronavirus pandemic raged, and sales fell 12.5%, according to Gartner. However, this demand has recovered quickly this year, as several countries lift restrictions on Covid lockdown. Gartner says that global smartphone sales increased by 26% in the first quarter.

Apple warning

On Tuesday, Apple CEO Tim Cook warned that silicon supply restrictions will affect sales of the iPhone as well as other products such as the iPad.

The shortcoming is not in the powerful processors that Apple produces for its devices, but chips for everyday functions such as the supply of mobile screens and decoding of sound, Cook said.

“Although Apple is one of the ‘big dogs’ that get top priority from chipmakers, it is vulnerable to silicon deficiency like everyone else,” Glenn O’Donnell, VP and head of research at analyst firm Forrester, told CNBC.

“While everyone focuses on CPUs (high end of chips), each device (including an iPhone) contains much more, and without these support chips, the phone is almost useless.”

Still, Apple has “proven remarkably resilient so far through the pandemic,” CCS Insight’s Wood said. “It testifies to the enormous focus on the supply chain.”

There are smaller manufacturers such as China’s Lenovo and TCL, and Finland’s HMD Global, which is probably struggling with the offer, Wood added.

HMD, which launches some new Nokia smartphones this summer, warned that semiconductor shortages could prove challenging for smaller device manufacturers.

“We see that there is definitely a general density” in the supply chain, “Florian Seiche, CEO of HMD, told CNBC. “We can see a certain imbalance in the market,” he said, adding that the demand for advanced models is quite high.

Like Apple, Samsung benefits from its size and bargaining power. However, analysts say the company is not out of the woods yet.

“Samsung seems to be the one most affected,” in the first half of 2021, Dale Gai, semiconductor analyst at Counterpoint Research, told CNBC.

The South Korean electronics giant was hit by a month-long shutdown of its semiconductor plant in Austin, Texas, earlier this year after a snowstorm led to a power outage. Meanwhile, Samsung’s factories in Vietnam suspended operations after discovering cases of coronavirus.

In March, the company said that there was a serious imbalance in supply and demand for chips in the IT sector, and that it could skip the launch of its next Galaxy Note handset.

On Thursday, Samsung said it saw a 54% increase in earnings in the second quarter as chip prices rose. The company predicted an improvement in the mobile market to pre-pandemic levels, but warned that the lack of non-memory chips poses a risk to forecasts.

Higher prices

Regarding the overall impact on smartphones, Gai said he expected the shortage to shave 10% of manufacturers’ production forecasts.

“I do not think the shortage will have a serious impact, but it will have an impact,” Forrester’s O’Donnell said.

So what does all this mean for you, the consumer?

“The likely outcome here is higher phone prices and a deeper shortage of certain models,” according to O’Donnell.

“In Apple’s case, you might get the highest iPhone 12, but not the iPhone XS in the lower part,” he said. “Other smartphone makers like Samsung, LG and the Chinese like Xiaomi and Huawei will all know each other.”

– CNBC’s Sam Shead and Kif Leswing contributed to this report.

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