The Seemingly Never Ending Chip Shortage
The component shortage keeps making headlines as technology companies from every sector of the market are struggling to get the necessary components to meet their manufacturing needs and satisfy their customer demand. This makes for interesting thinking when you factor in the record-setting pace of certain technology categories, like PCs and some smartphone brands, for example, that are already hitting record sales and would have likely sold in greater numbers if there was no component shortage. But the main question we have been engaging in with industry stakeholders is how much longer is this shortage is going to last? Unfortunately, this problem is not going away any time soon.
Before diving into the challenges within the silicon supply chain, it is worth pointing out the other compounding factors. You may have heard about the coal shortage China is facing. This issue with coal has led the Chinese government has to ration power which led to some factories having no power for blocks of time. Parts of China have also been facing issues getting the water they need for silicon production due to areas facing drought. And lastly, shipping issues are factoring into components themselves being moved in a timely fashion, as well as the final products themselves getting to retailer’s shelves and customer’s hands. I bring this up to point out all the compounding factors that are contributing to the component constraints and how many of these factors need to be solved as well in order to right this ship.
When it comes to the actual chip shortage, the issues stem mostly from legacy silicon node manufacturing, and in many aspects, this is impacting the analog semiconductor manufacturers significantly. Both analog and digital legacy products are being impacted, but analog components tend to be more legacy node products as a whole. Most of the legacy silicon manufacturing factories are located in mainland China, not Taiwan. Part of the solution here is to increase the world’s capacity in legacy node manufacturing, which is the goal of Global Foundries and a number of other government + private collaborations like the one making news by Japan, TSMC, and Sony this morning.
The US government has announced its intent to collaborate with private companies to increase the US semiconductor manufacturing capabilities, but significantly more capital is going to be necessary in order to have both leading-edge and legacy node silicon being manufactured at scale, for the global supply chain, in the United States.
One of the short-term impacts of this shortage is going to be the inevitable price increases across the board by foundries. TSMC has announced price increases for their leading-edge products, and supply chain analysts already see price increases at the trailing edge as well. I make this point because it is tied into the timeline for the overall chip shortage discussion. If the industry is stating this issue will go deep into 2022 and potentially into 2023, then it is reasonable to assume those price increases will last until this issue is resolved. This means pricing pressure will hit every technology vendor for the foreseeable future.
The last issue I want to highlight is this shortage may impact new product launches when it comes to new categories. We have all be hoping/waiting for some new technology and product breakthroughs, but I fear this component shortage will force vendors to focus more on their current roadmap for the time being than their future product roadmap until these issues are resolved.
There is simply no short-term or quick fix for this problem. Foundries over-invested in the leading edge node manufacturing and under-invested in the trailing edge. But even the leading edge, where large investments were made, are facing constraints that highlight how deep of a hole the industry is in with regard to trailing edge silicon manufacturing.
No company will be immune to this issue. The question that looms largest in my head is how much of the pricing challenge the vendors will eat vs. pass on to customers. My hunch is those who live with small margins will have to pass more of that price increase onto their customers. While those vendors who have higher margins can absorb more of the price increase, but potentially not all of the price increase.
I wish there was better news to report on this front but 2022, at the very least, looks to be as challenging if not more than 2021 when it comes to the supply chain challenges and component shortages.