Why the Chip Shortage Drags On and On … and On | WIRED
Why the Chip Shortage Drags On and On … and On
wired.com

Demand is still surging, but it takes time to build new factories. And
a history of highs and lows may deter some investors.
THE SEMICONDUCTOR INDUSTRY lives at the cutting edge of technological
progress. So why can’t it churn out enough
chips
 to keep the world moving?
Nearly two years into pandemic-caused disruptions, a severe shortage
of computer chips—the components at the heart of smartphones, laptops,
and innumerable
other products—continues to affect manufacturers across the global economy.
Automakers have been forced to halt production in recent months as
sales decline
 because they can’t make enough cars. The shortage has affected industries from
game consoles
 and
networking gear
 to
medical devices.
In October, Apple
blamed
 chip scarcity for crimping its financial results, and Intel
warned
 that the drought will likely stretch to 2023.
In short, the semiconductor supply chain has become stretched in new
ways that are deeply rooted and difficult to resolve. Demand is
ballooning faster
than chipmakers can respond, especially for basic-yet-widespread
components that are subject to the kind of big variations in demand
that make investments
risky.
“It is utterly amazing that it's taken so long for the supply chain to
rebound after the global economy came to a halt during Covid,” says
Brian Matas,
vice president of market research at
IC Insights,
an analyst firm that tracks the semiconductor industry.
For one thing, the sheer scale of demand has been surprising. In 2020, as
Covid
 began upending business as usual, the chip industry was already
expecting an upswing. Worldwide chip sales fell 12 percent in 2019,
according to the
Semiconductor Industry Association.
But in December 2019, the group
predicted that
 global sales would grow 5.9 percent in 2020 and 6.3 percent in 2021.
Chip Cycle
Global sales of semiconductors fell in 2019, before accelerating
during pandemic. (Sales in billions of dollars.)
$335
$339
$412
$469
$412
$440
Chart: WIRED
•
Source: Semiconductor Industry Association
In fact, the
latest figures
 show that sales grew 29.7 percent between August 2020 and August
2021. Demand is being driven by technologies like
cloud computing
 and
5G,
along with growing use of chips in all manner of products, from cars
to home appliances.
At the same time, US-imposed sanctions on Chinese companies like
Huawei, a leading manufacturer of smartphones and networking gear,
prompted some Chinese
firms to
begin hoarding as much supply as possible.
The surge in demand for high-tech products triggered by working from
home, lockdown ennui, and a shift to ecommerce has only continued,
taking many by surprise, says David Yoffie, a professor at Harvard
Business School who previously served on the board of Intel.
Chipmakers didn’t appreciate the extent of the sustained demand until
about a year ago, Yoffie says, but they can’t turn on a dime. New
chip-making factories cost billions of dollars and take years to build
and outfit. “It takes about two years to build a new factory,” Yoffie
notes. “And factories have gotten a lot bigger, a lot more expensive,
and a lot more complicated too.”
This week, Sony and Taiwan Semiconductor Manufacturing Company, the
world’s largest contract maker of chips, said they would invest $7
billion to build a fab capable of producing older components, but it
won’t start making chips until the end of 2024. Intel is also
investing in several cutting-edge new fabs, but those won’t come
online either until 2024.
Yoffie notes that only one company, ASML of the Netherlands, makes the
extreme ultraviolet lithography machines needed for cutting-edge
chip-making, and ASML can’t produce the machines quickly enough to
satisfy demand.
Another issue is that not all chips are created equal.
Simple components—power-control integrated circuits, microcontrollers,
and sensors—have become a key pinch point. These devices are far
simpler than the CPUs and GPUs used in smartphones and game machines
and are made using older manufacturing methods that require less
complexity. But they’re in just about every electronic product, from
microwave ovens to medical devices and toys.
A power-controlling integrated circuit used in many products that once
cost $1 can now sell for as much as $150, says Josh Pucci, a vice
president at Sourceability, which matches electronics component buyers
to sellers. IC Insights says lead times for such components have
stretched from 4-8 weeks to 24-52 weeks. Shortages of these devices
are boosting demand for hard-to-find older chip-making equipment.
Gartner estimates that semiconductor foundries operated at 95.6
percent of their capacity in the second quarter of 2021 compared with
76.5 percent in the second quarter of 2019. Gaurav Gupta, a Gartner
analyst, says this effectively means that plants are maxed out because
some downtime is needed for maintenance.
Tom Caulfield, the CEO of chipmaker GlobalFoundries, said in October
that his company was sold out through 2023. The CFO of Analog Devices,
which makes some of the components in greatest demand, told investors
in August that his company’s order book at the time stretched into its
next fiscal year, which began this month.
“What we just don't know is whether this ongoing growth in demand will
continue.”
DAVID YOFFIE, HARVARD BUSINESS SCHOOL AND FORMER BOARD MEMBER, INTEL
Part of the challenge for chipmakers is that some customers may be
“double ordering,” or buying more components than they need in case
supply dries up, distorting the picture of future demand. “It’s spot
shortages fueled by double ordering that’s making things worse,” says
Willy Shih, a Harvard professor who studies manufacturing and global
supply chains.
Analysts say the companies that make these chips may be reluctant to
invest in new factories because the chips carry thin profit margins
and the industry is notoriously cyclical, with spikes in demand
followed by sharp declines. They fear a future glut of chips that
would drive prices lower.
he history of the semiconductor industry, there are surges in
profitability and price followed by spectacular down cycles,” says
Yoffie at Harvard Business School. “What we just don't know is whether
this ongoing growth in demand will continue.”
There’s a lot of new chip-making capacity in the works, but most of it
will go to leading-edge chips. Gartner issued a report in January that
predicts chipmakers will invest $146 billion in new capacity this
year, up 50 percent from 2019, but only a small share will be for
older, more commonly used chips.
In theory, adding more capacity for leading-edge chips should free up
some factories to make older components, but not when demand outpaces
supply. Companies have recently begun investing in new capacity for
older chips, but only after requiring customers to commit to two years
of orders, says Pucci of Sourceability.
The strain placed on these components, and on the supply chain that
makes them, is evident from the way problems like water shortages in
Taiwan and extreme weather in Texas have impacted production. “There
just isn’t any room—a couple of weeks of inventory—to absorb any of
these impacts,” Pucci says.
“We talk about Covid as if it's in the past,” says Gad Allon, a
professor at the University of Pennsylvania's Wharton School of
Business. “But Covid is not in the past from a supply chain reality.”


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