Why the Chip Shortage Could Last Through 2022
The universal shortage of semiconductors, originating from global pandemic conditions, droughts, fires, and other disasters, has supply chain observers looking more closely at the situation and how to alleviate it. But the resulting information has cast up warning flags about selective pricing, stockpiling by customers, and other behavior that could lead to further market woes.
A recent report from the Dell’Oro research firm, for instance, found that despite revenue growth of 7% in the data center switch market this past quarter, shortages are likely to pinch results in the future, particularly as customers start stockpiling components in response to the crisis. For example, some cloud service providers, the firm says, hoarded chips in the 100-Gbit/s data center switch segment, causing market share numbers to shift.
The issue of hoarding isn’t limited to data center gear. As the shortage persists due to plant furloughs in Asia, makers of automobiles, consumer electronics, medical equipment, and more who respond by stockpiling chips could force market destabilization due to excess inventories.
There are other risks during the shortage. Some observers cite semiconductor allocation, the practice of granting favorable status to some customers over others, or of charging uneven pricing. This pattern can lead to stockpiling and inventory drainage. It also can lead to higher prices, as chip premiums are passed along the line to equipment makers and consumers.
The U.S. Government Seeks Answers
Last week, Biden administration officials met for the third time this year with several companies in the automotive and semiconductor industries to discuss measures to alleviate the shortages. Among the participants were representatives from Chrysler (NYSE: FCAU), Ford Motors (NYSE: F), General Motors (NYSE: GM), Daimler, and BMW, along with Ampere Computing, Apple (Nasdaq: AAPL), GlobalFoundries, Intel (Nasdaq: INTC) Micron (Nasdaq: MU), Microsoft (Nasdaq: MSFT), Samsung, and TSMC (NYSE: TSM).
An upshot of the meeting was a statement by Secretary of Commerce Gina Raimondo indicating her determination to get to the bottom of the situation. “It’s time to get more aggressive,” she said in an interview with Reuters. She plans to ask “dozens” of companies within the semiconductor supply chain to disclose data on inventory and sales within the next 45 days – first by asking, but then by mandating through existing disclosure laws if necessary.
And it may become so. Companies engaging in allocation practices, however legal, aren’t likely to want to reveal them. Still, semiconductor companies will have to engage if they’re looking to tap government funds to help alleviate shortages.
How Semi Manufacturers See the Situation
Semiconductor manufacturers are, of course, at the forefront of the shortage crisis. So it’s worth taking a look at how they’ve responded and how they see the situation unfolding. CEO Lisa Su of AMD (Nasdaq: AMD), for instance, recently said she expects the chip crisis to ease during the second half of 2022. She noted that chip factories planned during the pandemic will start to operate by that time.
During the latest earnings call for Broadcom (Nasdaq: AVGO), CEO Hock Tan said he’s purposely holding back on sales in order to avoid customer hoarding and a subsequent crash in demand. Tan also has his customers on non-cancellable, long-term orders to avoid customer stockpiling.
Under guidance of new CEO Pat Gelsinger, Intel has embarked on an expansion plan that includes a $20 billion investment in two new manufacturing facilities in Chandler, Arizona. The company broke ground on the project on September 24 and plans for the new facilities to be operational by 2024. Gelsinger has also said the new plants will be open to manufacturing chips for other suppliers. Intel also plans a foundry in Europe.
During NVIDIA’s most recent quarterly earnings call, CEO Jensen Huang of NVIDIA (Nasdaq: NVDA) said that demand for the company’s graphics processing units (GPUs) exceeds supply and will continue to do so through 2022.
TSMC (NYSE: TSM) execs have said that shortages will continue through 2022. The company, however, has plans to open a 5-nanometer chip factory in Phoenix, Arizona, which has just recently commenced construction.
GlobalFoundries, which is particularly essential to U.S. automakers, has pledged at least $6 billion to expand its manufacturing capacity, but execs expect the shortage to last through next year.
The Consensus
It’s clear that the consensus among suppliers is that the chip crisis will last through 2022, but that factories and manufacturing expansions planned last year should kick in by then to stave off further shortages. At the same time, government subsidization in the U.S. could eventually strengthen the country’s domestic supply chain.
On the downside, companies stockpiling chips could create weakened demand over the next few quarters for some suppliers. Whether the U.S. government will succeed in identifying the hoarders and relieving the bottlenecks remains to be seen.
