What is causing the shortage of chips affecting the PS5, cars and more?

A chip shortage that began when consumers stocked up on personal computers and other electronics during the Covid-19 pandemic now threatens to scold auto production around the world.

On Tuesday, GM said it would extend production cuts in the United States, 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 production of vehicles due to the chip shortage.

But it’s not just the auto industry that’s struggling to get enough semiconductors to make their products. AMD and Qualcomm, which sell chips to most of the major electronics companies, have noted the shortage in recent weeks. Sony blamed the chip shortage for why it’s so difficult to get a PlayStation 5 game console.

Chips are likely to remain scarce in the coming months as demand remains higher than ever. The Semiconductor Industry Association said in December that global chip sales will increase 8.4% in 2021 from the total of $ 433 billion in 2020. This represents a growth of 5.1% between 2019 and 2020 – a leap notable, given the importance of absolute figures.

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

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

The first wave involved the purchase of computers, monitors and other equipment for working or attending school remotely. Then, last fall, home entertainment gadgets like game consoles, televisions, smartphones and tablets started robbing the shelves.

PC sales rose 4.8% in 2020 to 275 million units, with growth of more than 10% during the holiday season, according to Gartner data. This reversed a multi-year decline and is the highest annual growth in the PC market since 2010.

Other gadgets have also sold well. The Consumer Tech Association, an American trade group, said 2020 was the biggest year on record with nearly $ 442 billion in retail sales revenue, and projected strong demand for game consoles, headphones. and smart home products in 2021.

All of these devices include a ton of chips – not just the mainframe which can cost tens or hundreds of dollars, but also smaller, cheaper chips to control the display, manage power, or run a 5G modem.

“The current chip shortage begins with the unprecedented demand for personal computers 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.

Electronics industry giants who have reported record sales say they could have been even better if there was enough supply. Apple, which recently reported an explosive $ 111 billion quarter, told analysts that it does not have enough of its new iPhones to meet demand. CEO Tim Cook told Reuters that “semiconductors are very tight.”

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

The shortage highlights a structural change in the semiconductor industry. Many of the big semiconductor companies are now “factory-less,” meaning they only design the chips and the technology inside. Other companies, known as foundries, are largely engaged to manufacture the chips.

Foundries are run by companies like TSMC in Taiwan or Samsung in South Korea – and it turns out they were already making chips as fast as they could. If a company cut back on orders at the start of the pandemic, it had to get back on track.

Automakers do not compete directly with high-tech companies for the same supply of chips. Car chips are generally based on older chip manufacturing technologies and do not need the latest technology.

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

“The shortage in the semiconductor industry is widespread,” Qualcomm’s new CEO Cristiano Amon said last month. “Not only the foreground nodes, but also the legacy nodes”, referring to the chip manufacturing technology.

Cars now include dozens of tiny chips, many of which perform functions such as managing power. Cars also use many microcontrollers, which can control traditional automotive tasks like power steering, or are the brain at the heart of an infotainment system. Automakers also typically use “just-in-time” production, which means they avoid stocking additional parts.

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

“If the chip that powers the on-board dials or automatic braking is delayed, so will the rest of the vehicle,” said Bryce Johnstone, automotive segment marketing director at chip designer Imagination Technologies.

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

Tech companies are “the volume guys. They have higher margins. And they never cut their orders and have long-term contracts with foundries,” Gupta said. “Now that this demand for automobiles has peaked faster than OEMs expected, automobiles cannot get back into the queue.”

Foundries are aware of the problem. TSMC, which is considered the most advanced and important foundry, said it is trying to help automakers and said it will spend up to $ 28 billion this year to increase capacity.

“As our capacity is fully utilized with demand from all industries, TSMC is reallocating its wafer capacity to support the global automotive industry,” TSMC said in a statement in January.

Automakers also use automotive grade chips, which are painstakingly “qualified” against industry standard binders to ensure they are durable and reliable. “It’s more difficult for the industry to alternately transition its production lines and supply chains elsewhere,” wrote Trendforce, a consultancy group covering the semiconductor industry, in a report on last month.

Last year, the United States imposed restrictions on Semiconductor Manufacturing International (SMIC), China’s largest foundry, preventing it from obtaining advanced chip-making equipment and making it much more difficult to sell its finished products to companies with ties to the United States. Customers had to shift their orders to competitors like TSMC, Gupta said.

SMIC leaders acknowledged that the US movement prevented it from using its full capacity when he said geopolitical factors would prevent it from seizing “this year’s rare market opportunity”, referring to the shortage of chips.

Some companies have also moved to stockpile essential chips before the US deadline, draining production capacity last year. For example, Huawei stored critical radio chips ahead of the sanctions, Bloomberg News reported.

Storage was also driven by supply issues as Covid swept the world. SK Hynix, a major memory chip maker, said last July that it had seen increased sales driven by “growing anxiety about the IT supply chain in general.”

Some companies that used to stock chips are now reaping the benefits. Toyota said Wednesday that it did not plan to cut its production rate because it had stored four months of chips to overcome the shortage. Toyota has raised its full-year profit forecast by 54%.