By Daniel Newman
In both cases, smartphone makers and automotive manufacturers heeded warnings of massive downtrends in demand. So they cut their semiconductor forecasts. And in a fabless world, where access to chips is entirely dependent on manufacturing facilities that handle the global demand for chips, those cuts led to gaping holes in supply.
Some may not understand that as soon as a smartphone or auto maker cuts its orders, the foundries move on to the next order, filling demand for the next in line, putting the original manufacturer at the back of the line. In what is perceived as an on-demand world, this industry has a queue, which means those who cut orders are left waiting.
Only some companies stockpiled
Some companies were more proactive than others. Recently, Toyota /zigman2/quotes/200537742/composite TM +1.82% said capacity would be unscathed by the semiconductor shortage. The company identified the opportunity to stockpile excess chips during the original pullback, which it will use to handle current increases in volume.
Huawei, amid a global regulatory battle, most notably with the U.S., has taken a multi-year proactive approach to stockpiling the essential chips it was dependent on the U.S. for. While we increasingly hear about Huawei’s challenges, including the massive opportunity to disrupt the 200 million-plus mobile devices sold by the company annually, the situation could have been even worse had it not been holding on to key components.
On a temporary basis, almost every business dependent on semiconductors is being adversely affected by the shortage. Excellent results for smartphone and PC makers could have been better if supply were available. The increase in demand for vehicles is also a positive sign of the recovery and stimulus at work, but lacking unit availability is likely to limit results for the next few quarters, and in some cases could impact jobs, which would come at a difficult moment in the global economic environment.
Biden’s 100-day review
The Biden administration is set to probe the semiconductor shortage to identify opportunities to improve both short- and long-term demand. The expected period for this review of the industry is around 100 days. Based on the expectation that demand should settle to a more normalized level, much of the industry seems to feel the most impactful period of the shortage could subside by mid-year.
While I don’t believe the administration’s involvement will have any short-term impact, we have hit a pivotal moment to reflect on how to address this shortage to prevent recurrences and protect the national interest.
The most likely course of stabilization will be a focus on onshoring greater chipmaking capacity. This effort could be accelerated with grants and tax incentives to encourage experienced global foundries to expand domestic capacity. Taiwan Semi is already expanding in Arizona, but it will require more significant resources to prevent further supply issues.
The good news is that over the past two decades, government investments in semiconductor manufacturing have been fruitful in yielding strong economic growth that comes from the ecosystem of semiconductors, including materials, manufacturing, distribution, R&D and more.
In terms of the national security implications, this issue has been somewhat conflated with the current shortage. Still, this situation also deserves attention from the administration, and bringing manufacturing back to the U.S. would vastly improve security interests. With Samsung’s proximity to North Korea, and Taiwan Semi sitting right on top of China, there would be greater stability in having increased physical security via domestic manufacturing.
A perfect storm of global macro environmental circumstances has led us to the substantial shortage in semiconductors plaguing industries and leaving consumers in a lurch while also driving up prices for certain components.
The situation will largely subside with normalized demand, but given the industry’s expectation of 8.4% growth in 2021, there are still challenges ahead.
With cloud, mobile, software, artificial intelligence (AI), electric vehicles (EV) and remote work just a few of the forces that won’t be slowed in the coming years, the demand for chips, materials, software, OEMs and peripherals will all but certainly continue to grow. That means opportunities for strong earnings and revenue performance, but only if we can build the infrastructure to keep up.
Daniel Newman is the principal analyst at , which provides or has provided research, analysis, advising, and/or consulting to Nvidia, Intel, Salesforce, IBM, Microsoft, Amazon, Oracle and dozens of companies in the tech and digital industries. Neither he nor his firm holds any equity positions with any companies cited. Follow him on Twitter @danielnewmanUV.