Impact of low chip supply spreads

Covid-19, shifts in consumer purchasing, sanctions and a drought in Taiwan have come together as a perfect storm to squeeze the supply of semiconductors

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There is a growing crisis in the chip manufacturing industry that is affecting the supply of electronic components. Problems first started hitting car manufacturing as semiconductor providers shifted from supplying chips for connected cars, to meet demand for consumer electronics during the Covid-19 pandemic. The shortage is now spreading, possibly as a result of US sanctions against China.

Bloomberg reported recently that BMW had reduced shifts in Germany and England where the Mini is manufactured, while Honda has halted production in three of its Japanese plants.

Ford said the semiconductor shortage had prompted it to accelerate modernisation of its sales processes – incorporating new ordering capabilities to make them more appealing to customers, raise inventory turn rates, and reduce and maintain inventories below traditional levels.

In December 2020, Volkswagen said the massive semiconductor supply bottleneck was causing “considerable disturbances for manufacturers throughout global vehicle production”. The FT reported recently that VW had warned that the continued chip shortage could have a major impact on production in Q2 2021. There are also reports that Jaguar Land Rover has cut production and Renault has suspended production.

In a podcast discussing the impact of the crisis on carmakers, Olivier Blanchard, a senior analyst at Futurum Research, said: “Essentially, Covid has forced automakers to temporarily shut their factories down.” 

Surge in PC sales

In a blog post describing the global chip shortage, Glenn O’Donnell, vice-president and research director at analyst firm Forrester, described how the increase in working from home had led to a surge in PC sales. “You need a good PC to work from home,” he said. “PC makers buy lots of semiconductors. Zoom, Teams and other collaboration platforms became the meeting room, the water cooler, the schoolroom and the family reunion, all rolled into one.

“Demand for these services exploded. Since they are all running in the cloud, the cloud services need more chips.”

Semiconductor manufacturers, which were making a lot of chips for connected vehicles, started to reassign production capacity to provide semiconductors for customers of devices such as games consoles, smartphones and laptops, as a result of the increases in sales of such products during the pandemic.

Blanchard said that the situation on cars is changing. “With interest rates so low, people have started buying cars again,” he said. “The demand for vehicles has bounced back a lot sooner than everyone anticipated. But the lead time for suppliers to respond to automakers, is about six to nine months.”

This means they cannot provide the necessary volume of semiconductors to meet demand for connected car sales, he added.

Cause and effect of trade sanctions

According to some internet reports, the US sanctions against China may have acted as a catalyst for some Chinese manufacturers to stockpile semiconductors.The chip shortage now appears to be spreading, and according to the FT, Samsung Electronics and LG Electronics have both raised concerns over the crisis. 

In its secord-quarter 2021 filing, Samsung reported a decline in earnings from mobile displays because of chip shortages affecting major smartphone customers and weak seasonality.

In its latest quarterly earnings report, Apple said it expected $3bn to $4bn supply constraints. In a transcript of the earnings call, posted on the Seeking Alpha financial blogging site, CEO Tim Cook said the constraints were  a result of the semiconductor shortages, which are impacting many industries.

“It’s a combination of the shortages as well as the very, very high level of demand that we are seeing for both iPad and Mac,” he said. “For Mac, for example, just to keep it in context, the last three quarters of Mac have been the best three quarters ever in the history of the product.”

According to a blog post by SustainAnalytics, a typical semiconductor fabrication plant consumes between two and four million gallons of water a day. Semiconductors need to be washed at several stages during their manufacture in ultra-pure water.   

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Taiwan Semiconductor Manufacturing Company (TSMC) is one of the biggest contract manufacturers of semiconductors and managing the supply of clean water is one of its priorities, especially given that there has been a lack of rainfall in Taiwan. But according to a transcript of its Q1 2021 call, posted on the company’s website, this water management has not impacted production.

CC Wei, president and CEO of TSMC, said: “The water supply in Taiwan is currently tight due to the lack of rainfall in the past year. We have been prepared for this. TSMC has a long-established enterprise risk management system in place, which covers water supply risk as well.

“Through our existing water-conservation measures, we are able to manage the current water usage reduction requirement from the government with no impact on our operations. We also have a detailed response procedure to handle a water shortage at different stages.

“We will continue our collaborative effort with the government and the private sector on water conservation and new water sources. With our comprehensive enterprise risk management system, we do not expect to see any material impact to our operations.”

Nevertheless, ramping up production in any semiconductor fabrication plant has a knock-on effect on water consumption. Meeting the increased demand from manufacturers requiring semiconductors is not a simple case of opening up the water tap.

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