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

The shortage of chips that began when consumers ran out of personal computers and other electronics during the Covid-19 pandemic now threatens car production around the world.

On Tuesday, GM said it would extend production cuts to the U.S., Canada and Mexico through mid-March. They join a long list of major automakers, including Ford, Honda and Fiat Chrysler, that have warned investors or slowed vehicle production due to a shortage of chips.

But it’s not just the auto industry struggling to get enough semiconductors to build its products. AMD and Qualcomm, which sell chips to most major electronics companies, have noted shortages in recent weeks. Sony blamed the shortage of chips for making it so difficult to get a PlayStation 5 gaming console.

Chips are likely to remain in short supply in the coming months, as demand continues to be higher than ever. The Semiconductor Industry Association stated in December that global chip sales would grow by 8.4% in 2021, from $ 433 billion in 2020. This exceeds growth of 5.1% between 2019 and 2020, a remarkable leap, given the large number of absolute figures.

Semiconductors are scarce due to strong demand for electronics, changing business models in the semiconductor world that created a bottleneck between subcontracted chip factories, and the effects of the U.S. trade war with China. which began under former President Trump.

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

The first wave consisted of buying PCs, monitors and other equipment to work or go to school at a distance. Then last fall, home entertainment devices like game consoles, TVs, smartphones and tablets began flying off the shelves.

PC sales rose 4.8% in 2020 to 275 million units, up more than 10% in the holiday season, according to Gartner data. This reversed a decline years ago and is the highest annual growth in the PC market since 2010.

Other appliances also sold well. The Consumer Tech Association, an American trading group, said 2020 was the largest year on record with nearly $ 442 billion in retail revenue and projected high demand for gaming consoles, headphones and smart home products in 2021.

All of these devices include a lot of chips, not just the central processor, which can cost tens or hundreds of dollars, but also smaller, less expensive chips to control the screen, manage power, or operate a 5G modem.

“The current shortage of chips begins with the unprecedented demand for personal computers and peripherals as the world operated and attended school from home,” said Patrick Moorhead, founder of Moor Insights, a company that studies the semiconductor industry.

Electronics giants that have recorded record sales say they could have been even better if there was enough supply. Apple, which recently reported $ 111 billion in savings, told analysts it didn’t have enough supply for its new iPhones to meet demand. CEO Tim Cook told Reuters that “semiconductors are very tight.”

Lisa Su, CEO of AMD, which makes the processor the hub of Sony and Microsoft’s new consoles, said last month that she expects shortages at least during the first half of the year. “The industry needs to increase overall capacity levels,” Su said.

The shortage reveals a structural change in the semiconductor industry. Many of the major semiconductor companies are now “fabless,” meaning they only design the chips and technology they contain. Other companies, known as foundries, have a large contract to manufacture the chips.

The 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 possible. If a company cut orders in the early days of the pandemic, they should be back in line.

Vehicle manufacturers do not compete directly with high-tech companies for the same supply of chips. Car chips are usually based on older chip manufacturing technologies and do not need the advantage.

But scarcity is not just in the fastest chips, but in everything.

“The shortage in the semiconductor industry is general,” said Cristiano Amon, CEO of Qualcomm, last month. “Not just the main nodes, but the inherited nodes,” referring to chip manufacturing technology.

Cars now include dozens of tiny 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 center of an entertainment and entertainment system. Car manufacturers also tend to use production “just in time,” which means they avoid having additional parts stored.

“The problem is even if this 10-cent chip is missing, the $ 30,000 car can’t be sold,” said Gaurav Gupta, a Gartner semiconductor analyst.

“If the chip that powers the car’s dials or automatic braking is delayed, so will the rest of the vehicle,” said Bryce Johnstone, marketing director for the automotive segment of chip designer Imagination Technologies at CNBC.

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

Technology companies are “the type of volume. They have higher margins. And they never reduce their orders and have long-term contracts with foundries,” Gupta said. “Now that this demand for cars has reached its peak faster than OEMs had expected, cars cannot return to the queue.”

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

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

Automakers also use quality automotive chips, which are meticulously “qualified” against industry standard binders to ensure they are durable and reliable. “It’s harder for the industry to make an alternative transition from its production lines and supply chains to other places,” wrote Trendforce, a consulting group that covers the semiconductor industry, in a report last month.

Last year, the United States imposed restrictions on Semiconductor Manufacturing International (SMIC), China’s largest foundry, which prevented it from obtaining advanced chip-making gears and made it very difficult to sell its finished products to companies with American links. Customers needed to transfer their orders to competitors like TSMC, Gupta said.

SMIC executives acknowledged that the U.S. move has prevented it from using its full capacity when they said geopolitical factors would prevent it from taking advantage of “this year’s rare market opportunity,” in reference to the shortage of chips. .

Some companies also decided to store essential chips before the U.S. deadline, using production capacity last year. For example, Huawei stored critical radio chips before the sanctions, Bloomberg News reported.

Storage was also driven by supply concerns, as Covid spread around the world. SK Hynix, a major manufacturer of memory chips, said last July that it experienced an increase in sales driven by “growing anxiety about the overall IT supply chain.”

Some companies that store tokens are making profits now. Toyota said Wednesday it does not expect to slow its production rate because it had stored four-month chips to overcome the shortage. Toyota increased its year-over-year profit forecast by 54%.