What causes the lack of chips that affect PS5, cars and more?

A chip shortage that began as consumers stocked up on personal computers and other electronic devices during the Covid-19 pandemic now threatens the production of cars around the world.

On Tuesday, GM said it would extend production cuts in the United States, Canada and Mexico until mid-March. It joins a long list of major carmakers, including Ford, Honda and Fiat Chrysler, who have warned investors or slowed down vehicle production due to a lack of chips.

But it’s not just the car industry that is struggling to get enough semiconductors to build its products. AMD and Qualcomm, which sell chips to most top electronics companies, have noticed a shortage in recent weeks. Sony blamed the lack of chips on why it’s so hard to get a PlayStation 5 game console.

The chips will remain in small quantities in the coming months, as demand remains higher than ever. The semiconductor industry association said in December that global chip sales will increase by 8.4% in 2021, from a total of $ 433 billion in 2020. It will increase from a 5.1% increase between 2019 and 2020 – a notable jump given how high the absolute numbers are.

Semiconductors are few due to strong demand for electronics, changing business models in the semiconductor world that have created a deadlock among outsourced chip factories and the effects of the US trade war with China, which began under former President Trump.

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

The first wave involved people buying PCs, monitors and other equipment to work or go to distance school. Then last fall, home entertainment gadgets such as game consoles, TVs, smartphones and tablets began to fly off the shelves.

PC sales rose 4.8 percent in 2020 to 275 million units, up more than 10 percent in the holiday season, according to Gartner data. It has reversed a decline for years and is the largest annual growth in the computer market since 2010.

Other gadgets 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 projecting high demand for gaming consoles, headphones and smart home products in 2021.

All of these devices include a ton of chips – not just the CPU that can cost tens or hundreds of dollars, but also less expensive chips for display control, power management, or operating a 5G modem.

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

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 quarterly explosion, told analysts it did not have enough new iPhones to meet demand. CEO Tim Cook told Reuters that “semiconductors are very tight.”

AMD CEO Lisa Su, who makes the processor the center of the new Sony and Microsoft consoles, said last month that he expects shortages at least in the first half of the year. “The industry needs to increase global capacity levels,” Su said.

The lack highlights a structural change in the semiconductor industry. Many of the top semiconductor companies are now “fabless,” which means they only design the chips and technology in them. Other companies, known as foundries, are largely contracted to produce chips.

The foundries are run by companies such as TSMC in Taiwan or Samsung in South Korea – and, as it turns out, they were already making chips as fast as they could. If a company cut orders in the early days of the pandemic, it should return to the queue.

Manufacturers do not compete directly with high-tech companies for the same chip supply. Car chips are usually based on older chip manufacturing technologies and do not need a bleeding edge.

But the lack is not only in the fastest chips – it is in all.

“The shortfall in the semiconductor industry is general,” said Cristiano Amon, Qualcomm’s new CEO, who came last month. “Not only driving nodes, but also old nodes”, referring to chip manufacturing technology.

Cars now include dozens of small chips, many of which perform functions such as power management. The cars also use a lot of microcontrollers, which can control traditional car tasks, such as power steering, or are the brain at the center of an infotainment system. Car manufacturers also use production “just in time”, which means they avoid having additional parts stored.

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

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

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

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

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

“While our capacity is being fully utilized with demand from each sector, TSMC is reallocating our wafer capacity to support the automotive industry around the world,” TSMC said in a January statement.

Vehicle manufacturers also use automotive quality chips, which are carefully “qualified” against industry standard binders to ensure they are durable and reliable. “It is more difficult for the industry to alternately transition its production lines and supply chains elsewhere,” Trendforce, a consulting group covering the semiconductor industry, wrote in a report last month.

Last year, the United States imposed restrictions on Semiconductor Manufacturing International (SMIC), China’s largest foundry, banning it from accessing advanced chip manufacturing equipment and making it much more difficult to sell finished products to US-linked companies. Customers had to transfer their orders to competitors such as TSMC, Gupta said.

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

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

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

Some chip storage companies now benefit. Toyota said on Wednesday that it did not expect to reduce its production rate because it had accumulated chips worth four months to eliminate the shortage. Toyota raised its year-over-year earnings forecasts by 54%.