What is causing the lack of chips that affects the PS5, cars and more?

A chip shortage that began when consumers stockpiled personal computers and other electronics during the Covid-19 pandemic now threatens to hamper car production worldwide.

On Tuesday, GM said it would extend production cuts in the US, Canada and Mexico until mid-March. They join a long list of major car manufacturers, including Ford, Honda and Fiat Chrysler, who have alerted investors or reduced vehicle production because of chip shortages.

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

The chips are expected to remain under-supplied in the coming months, as demand remains higher than ever. The Semiconductor Industry Association said in December that global chip sales would grow 8.4% in 2021, compared to a total of $ 433 billion in 2020. That’s 5.1% growth between 2019 and 2020 – a notable jump, given how big the absolute numbers are.

Semiconductors are in short supply because of strong demand for electronics, changes in business models in the semiconductor world that have created a bottleneck between outsourced chip factories and the effects of the US trade war with China, which started under the former President Trump.

The Covid-19 pandemic spurred demand for consumer electronics.

The first wave involved people buying PCs, monitors and other equipment to work or go to school remotely. Then, last fall, home entertainment gadgets like game consoles, TVs, smartphones and tablets started to come off the shelves.

PC sales increased 4.8% in 2020 to 275 million units, with growth of more than 10% in the holiday season, according to data from Gartner. This reversed a decline of years and is the biggest annual growth in the PC market since 2010.

Other devices also sold well. The Consumer Tech Association, an American trade group, said that 2020 was the biggest year on record, with nearly $ 442 billion in retail sales revenue, and is projecting high demand for game consoles, headsets and home products. in 2021.

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

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

The electronics giants that reported record sales say they could have been even better if there was enough supply. Apple, which recently reported a $ 111 billion explosion in the quarter, told analysts that it did not have enough of its new iPhones to meet demand. CEO Tim Cook told Reuters that “semiconductors are very rigid”.

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

The shortage is highlighting a structural shift in the semiconductor industry. Many of the leading semiconductor companies are now “factory-free,” meaning that they design only the chips and the technology they contain. Other companies, known as smelters, are widely hired to actually make the chips.

The foundries are run by companies like TSMC in Taiwan or Samsung in South Korea – and, it seems, they were already making chips as fast as they could. If a company cut back on orders in the early days of the pandemic, it would have to get back on track.

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

But scarcity is not just in the fastest chips – it is in everything.

“Shortages in the semiconductor industry are widespread,” said Cristiano Amon, Qualcomm’s CEO, last month. “Not just major nodes, but inherited nodes,” referring to chip-making technology.

The cars now include many tiny chips, many of which perform functions like power management. Cars also use many microcontrollers, which can control traditional automotive tasks, such as power steering, or are the brain at the heart of an infotainment system. Car manufacturers also often use “just-in-time” production, which means that they avoid having extra parts in storage.

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

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

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

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

Foundries are aware of the problem. TSMC, which is seen as the most advanced and important smelter, said it was trying to help automakers 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 is reallocating our wafer capacity to support the global automotive industry,” said TSMC in a statement in January.

Car manufacturers also use automotive chips, which are meticulously “qualified” by industry standards to ensure they are durable and reliable. “It is more difficult for the industry to alternatively transition its production lines and supply chains elsewhere,” wrote Trendforce, a consulting group covering the semiconductor industry, in a report last month.

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

SMIC executives acknowledged that the US measure prevented it from using its full capacity when it said that geopolitical factors would prevent it from taking advantage of “this year’s rare market opportunity”, referring to the chip shortage.

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

Inventory was also driven by supply concerns as Covid spread across the world. SK Hynix, a major memory chip maker, said last July that it saw an increase in sales driven by “growing anxiety about the IT supply chain in general”.

Some companies that have stored chips are now reaping the benefits. Toyota said on Wednesday that it does not expect to cut its production rate because it had stockpiled four months of chips to overcome the shortage. Toyota increased its profit forecast for the whole year by 54%.