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What causes chip shortages that affect PS5, cars and more?

A close-up of a CPU socket and motherboard lying on the table.

Narumon Bowonkitwanchai | Moment | Getty Images

A chip shortage that started when consumers stock up on computers and other electronics during the Covid-19 pandemic is now threatening to smash car production worldwide.

On Tuesday, GM said it would expand production cuts in the United States, Canada and Mexico until mid-March. They join a long list of major carmakers, including Ford, Honda and Fiat Chrysler, who have warned investors or slowed car production due to a lack of chips.

But it is not just the car industry that is struggling to get enough semiconductors to build its products. AMD and Qualcomm, which sell chips to most of the best electronics companies, have noticed the shortage in recent weeks. Sony blamed the chip shortage for why it̵

7;s so difficult to get a PlayStation 5 game console.

Chips are likely to be in short supply in the coming months, as demand is still higher than ever. The Semiconductor Industry Association said in December that global chip sales would grow 8.4% by 2021 from 2020’s total of $ 433 billion. That is up from 5.1% growth between 2019 and 2020 – a remarkable jump, given how large the absolute numbers are.

Semiconductors are in short supply due to strong demand for electronics, shifting business models in the semiconductor world that created a bottleneck among outsourced chip factories and effects from the US trade war with China that began under former President Trump.

A huge boom in the sale of electronics

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

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

Living room with a Sony PlayStation 5 video game console and DualSense controls along with a TV, taken November 3, 2020.

Phil Barker | Future publication via Getty Images

PC sales increased by 4.8% in 2020 to 275 million units, with over 10% growth in the holiday season, according to Gartner data. It reversed a year-long decline, and is the highest annual growth in the PC market since 2010.

Other gadgets also sold well. The Consumer Tech Association, an American trading group, said 2020 was the biggest record year with nearly $ 442 billion in sales revenue, and estimates high demand for game consoles, headphones and smart home products by 2021.

All of these devices include tons of chips – not just the central processor that can cost tens or hundreds of dollars, but also cheaper small chips to control the screen, or control the power, or operate a 5G modem.

“The current chip shortage starts with the unique demand for personal computers and peripherals while the globe worked and went to school from home,” said Patrick Moorhead, founder of Moor Insights, a company studying semiconductor industry.

Electronic industry giants that have reported record sales say they could have been even better if there was enough supply. Apple, which recently reported a $ 111 billion blowout quarter, told analysts they did not have enough access to their new iPhones to meet demand. CEO Tim Cook told Reuters that “semiconductors are very tight.”

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

Business change for outsourcing beats factories

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

The foundry is run by companies such as TSMC in Taiwan or Samsung in South Korea – and as it turns out, they already made chips as fast as they could. If a company cut orders in the early days of the pandemic, they had to come back in line.

Car manufacturers do not compete directly with high-tech companies for the same chip supply. Car chips are usually based on older technology for the production of chips and do not need the bleeding edge.

The Ford company logo appears on a sign outside the Chicago Assembly Plant on February 3, 2021 in Chicago, Illinois.

Scott Olson | Getty Images

But the shortage is not just in the fastest chips – it is in everything.

“The shortage in the semiconductor industry is across the board,” said incumbent Qualcomm CEO Cristiano Amon last month. “Not just leading nodes, but older nodes,” referring to chip production technology.

Cars now include many small 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 are the brain at the heart of an infotainment system. Car manufacturers also typically use “just-in-time” production, which means they avoid having extra parts in stock.

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

“If the chip that drives the steering wheel in the car or automatic braking is delayed, so will the rest of the vehicle,” Bryce Johnstone, director of car segment marketing at chip designer Imagination Technologies, told CNBC earlier.

The car industry now realizes that it is a lower priority than the electronics companies at the foundries. In 2020, only 3% of TSMC’s sales were from car chips, compared to 48% for smartphones.

Technical companies are “volume guys. 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 peaked faster than the OEMs had expected, cars can not get back in line.”

The foundry is aware of the problem. TSMC, which is seen as the most advanced and important foundry, said they were trying to help car companies, saying they would spend as much as $ 28 billion this year on increasing capacity.

“While our capacity is fully utilized with demand from all sectors, TSMC is redistributing our wafer capacity to support the worldwide automotive industry,” TSMC said in a statement in January.

Car manufacturers also use car-quality chips, which are carefully “qualified” against industry-standard binders to ensure that they are durable and reliable. “It is more difficult for the industry to alternatively transfer its production lines and supply chains elsewhere,” Trendforce, a semiconductor industry consulting group, wrote in a report last month.

Trump’s trade war

Last year, the United States imposed restrictions on Semiconductor Manufacturing International (SMIC), the largest foundry in China, preventing it from obtaining advanced equipment for chip production, making it much more difficult to sell its finished products to companies with American tapes. Customers needed to move their orders to competitors such as TSMC, Gupta said.

SMIC executives acknowledged that US action has prevented it from using its full capacity when they said that geopolitical factors would prevent it from exploiting “this year’s rare market opportunity”, citing chip shortages.

Some companies also decided to store important chips before the US deadline, and used production capacity last year. For example, Huawei made critical radio chips in front of sanctions, Bloomberg News reported.

Storage was also driven by supply of concern as Covid swept around the world. SK Hynix, a major manufacturer of memory chips, said in July last year that it saw an increase in sales driven by “increasing anxiety for the IT supply chain in general.”

Some companies that make chips are reaping the benefits now. Toyota said on Wednesday that they do not expect to reduce production rates because they had stored four-month chips to eliminate the shortage. Toyota increased its full-year earnings forecast by 54%.

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