By Daniel Newman
The global chip shortage came as sudden news to many investors in industries that rely on the tiny, yet ubiquitous, electronic product.
The delay, which is affecting products from cars to smartphones, has been looming for some time. Playing a pivotal role has been a series of external forces, including trade restrictions, offshoring and the global Covid-19 pandemic.
With the vast majority of chip production for U.S. and global technology original equipment manufacturers (OEMs) now being done in Asia by the likes of Taiwan Semiconductor Manufacturing /zigman2/quotes/204359850/composite TSM +0.50% , Samsung and United Microelectronics /zigman2/quotes/207234499/composite UMC +2.65% , we are currently experiencing the potential downside to a fabless ecosystem with minimal onshore production capabilities. Global technology leaders Apple /zigman2/quotes/202934861/composite AAPL +1.79% , AMD /zigman2/quotes/208144392/composite AMD -2.08% , Sony and Qualcomm /zigman2/quotes/206679220/composite QCOM +2.00% represent a sampling of the companies that referenced the shortage in recent weeks.
Despite discussion about the shortage, it still feels like most people don’t know what happened. And while our strained relationship with China certainly played a role, there was no more significant catalyst than Covid-19 coupled with wildly inaccurate forecasts tied to the unknowns of a sustained global pandemic.
When Covid-19 hit China, it caused the first wave of supply constraints. Factories shuttered to deal with the pandemic, producing a slowdown in manufacturing that would lead to a drop in items that would require chips. As the pandemic moved from China to across the world, the issue went from one of limited sales capacity for chip-dependent industries to one of potentially halted demand. This is where the deepest wounds of the shortage originated.
In the early days of the global pandemic, we saw unprecedented demand for PCs, cameras, keyboards and displays. People who had PCs realized they needed better versions, and multi-person households could no longer share devices. This growing demand led to over 10% growth in the PC space for 2020, and surging demand in the fourth quarter reached 25.4%.
In itself, that caused a chip crunch as demand didn’t just peak for a short period to help people work and learn remotely, but the need stayed high with expectations that it would continue for at least a few more quarters.
Covid-19 didn’t only drive demand for PCs; it fundamentally changed our behavior. It halted going out to eat, attending a ballgame or going to the movies. This behavioral shift moved dollars from venues to home entertainment. People in droves were buying smart TVs, streaming services and gaming consoles. Like PCs, all of these are dependent on volumes of chips — and this demand wasn’t expected, and therefore wasn’t forecasted.
Tablets had their strongest demand since 2015, with over 160 million units sold in 2020. For Chromebooks, over 11 million units were sold versus less than 4 million a year earlier. Smart televisions flew out the door, up from less than 4 million units in the fourth quarter of 2019 to nearly 5 million units a year later.
Coupled with this demand came a complete miss from economists and demand planners across sectors.
The first was the mobile (smartphone) industry. With the rising demand for PCs early on in the pandemic came a narrative of stifled demand for smartphones. With all of us locked down at home, we were supposed to see material decreases in mobile devices’ demand. While forecasters were right in the early onset of the pandemic, it was business as usual for the smartphone industry by the third quarter.
By the fourth quarter, demand had surged to nearly pre-pandemic levels, down by only 2%, according to Canalys data. The 5G cycle, including the introduction of Apple’s 5G variant, further spurred demand.
The supply constraints for smartphone chips were evident in recent earnings results such as Qualcomm’s, which said sales were restrained by a lack of semiconductor supply. This theme was echoed among chipmakers including Intel /zigman2/quotes/203649727/composite INTC +0.73% , AMD, Nvidia /zigman2/quotes/200467500/composite NVDA -0.68% and Micron Technology /zigman2/quotes/205710729/composite MU +0.51% .
The second big forecasting miss came in the automotive industry. Shutdowns due to Covid-19 in factories, coupled with expected economic strains, led automakers to cut forecasts for production and vehicle demand. And while the estimates for decreased automotive sales look to be around 15% year over year for 2020, much like the smartphone space, the demand for new vehicles has surged into the close of 2020, leaving many automakers, including GM /zigman2/quotes/205226835/composite GM +1.56% , Ford /zigman2/quotes/208911460/composite F +1.94% and Honda /zigman2/quotes/207173990/composite HMC +2.21% , short on the chips required to produce cars.
For 2021, forecasts are expecting growth of demand for new vehicles to jump around 10%. This wave of demand further stresses the semiconductor industry as a new vehicle can have upward of 50 chips, with hybrid models often requiring two times the number of semiconductors as traditional vehicles.