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- Have all parts of the consumer electronics industry been equally affected?
- What are some of the measures different companies/parts of the industry have taken in order to deal with the shortage of semiconductors?

Other points to note:
- Be careful of the structure of the report to make sure there's a nice flow to the report.

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Measures created to overcome the shortage

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Measures created to overcome the shortage

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Measures in China
Over the past few years, China tried to boost its semiconductor industry through tax breaks (tariffs), but was affected due to U.S sanctions stopping U.S firms from exporting certain technology to China.

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GUANGZHOU, China - If you talk about chipmaking, two companies usually spring to mind - Taiwan's TSMC and South Korea's Samsung Electronics. The two Asian firms combined control more than 70% of the semiconductor manufacturing market.

The U.S., which was once a leader, lags behind in this space after monumental shifts in the business models in the semiconductor industry.

But a global semiconductor shortage and geopolitical tensions with China have bolstered Washington's scrutiny of the supply chain, which is concentrated in the hands of a small number of players, and has created a drive to bring manufacturing back to American soil to regain leadership.

The U.S. has earmarked billions of dollars and is reportedly looking at alliances with other nations.

Semiconductors are critical to everything from cars to the smartphones we use. And they have also been thrust into the center of U.S.-China tensions.

"One characteristic of US policy is that it has heavy emphasis on China. This has now become a national imperative to enhance self-sufficiency in semis production, accelerated by the recent chip shortages and the 'tech war' against China," Bank of America said in a note published Wednesday.

How Asia came to dominate manufacturing

The key to understanding the geopolitics of semiconductors, which countries dominate and why the U.S. is trying to boost its domestic industry, lies in coming to grips with the supply chain and business models.

Companies like Intel are integrated device manufacturers (IDMs), which design and manufacture their own chips.

Then there are the fabless semiconductor firms, which design chips but outsource manufacturing to so-called foundries. The two biggest foundries are TSMC in Taiwan and Samsung Electronics in South Korea.

Over the last 15 years or so, companies began shifting to this fabless model. TSMC and Samsung took advantage as they began to invest heavily in leading-edge manufacturing technology. Now if a company like Apple wants to get the latest chip for their iPhone produced, they have to turn to TSMC to do it.

TSMC has 55% foundry market share and Samsung has 18%, according to data from Trendforce. Taiwan and South Korea collectively have 81% of the global market in foundries, highlighting the dominance and reliance on these two countries as well as on TSMC and Samsung.

"In 2001, 30 companies manufactured at the leading edge however as semi manufacturing grew in cost and difficulty, this number has fallen to just 3 firms" - TSMC, Intel and Samsung, according to a note from Bank of America published in December.

However, Intel's manufacturing process is still behind that of TSMC and Samsung.

"Taiwan and South Korea have become leaders in wafer fabrication which requires massive capital investment; and part of their success over the last 20 years is due to supportive government policies and access to skilled labour forces," Neil Campling, head of technology, media and telecoms research at Mirabaud Securities, told CNBC by email.

The complex supply chain

While TSMC and Samsung are the dominant manufacturers of semiconductors, they still rely heavily on equipment and machinery from the U.S., Europe and Japan.

The companies that make these tools required by foundries are known as semiconductor capital equipment vendors or "semicap" for short.

The top five semicap equipment vendors make up nearly 70% of the market, according to Bank of America, citing Gartner data. Three of the five are U.S. companies, one is European and one is Japanese.

Netherlands-based ASML is the only company in the world that can make so-called extreme ultraviolet (EUV), which is required to make the most advanced chips such as those manufactured by TSMC and Samsung.

What is the U.S. planning and why?

So, the U.S. is not necessarily falling behind in the semiconductor industry as a whole. Some of its firms are integral to the supply chain. But one area it has lagged in is manufacturing.

Under President Joe Biden, the U.S. is looking to regain leadership in manufacturing and secure supply chains.

In February, Biden signed an executive order which involves a review of the semiconductor supply chain to identify risks. As part of a $2 trillion economic stimulus package, $50 billion was earmarked for semiconductor manufacturing and research. A bill known as the CHIPS for America Act is also working its way through the legislative process and aims to provide incentives to enable advanced research and development and secure the supply chain.

Meanwhile, U.S. firm Intel last month announced plans to spend $20 billion to build two new chip factories and said it will act as a foundry. This could offer a domestic alternative to the likes of TSMC and Samsung.

Part of that scrutiny on the supply chain has been prompted by a global chip shortage that's hit the automotive industry. The coronavirus pandemic accelerated demand for personal electronics like laptops and games consoles just as industrials and automakers wound down production. But a rebound in production plus heightened demand for chips in various sectors has triggered a shortage.

The concentration of production in the hands of TSMC and Samsung has worsened the problem.

The semiconductor supply shortage "has probably made the U.S. administration realise they aren't in control of their own destiny," according to Mirabaud Securities' Campling.

But there are also geopolitical factors at play, informing U.S. policy.

"Over the longer-term, the Biden administration wants to continue to encourage both foreign and U.S. semiconductor manufacturers to expand capacity in the U.S., to reduce dependence on manufacturing in geopolitically sensitive areas such as Taiwan, and create high paying engineering jobs in the U.S.," Paul Triolo, head of the geo-technology practice at Eurasia Group, told CNBC by email.

Part of the U.S. policy in the semiconductor space involves forming alliances. Earlier this month, the Nikkei reported that the U.S. and Japan will cooperate on supply chains for critical components like semiconductors. The two sides will aim for a system where production is not concentrated on specific regions like Taiwan, the Nikkei said.

"The U.S. is trying to cut China out of the equation," Abishur Prakash, a geopolitical specialist at the Center for Innovating the Future, a Toronto-based consulting firm, told CNBC via email.

"It is trying to redesign how the world's chip industry works in the face of a rising China. This is not necessarily about self-sufficiency, although Washington would welcome this. Instead, it is about building up critical sectors - from AI to chips - that are insulated from geopolitics. And, because several nations share U.S. concerns about China, the U.S. is taking a chunk of the world with it."

China's push for self-sufficiency

China meanwhile is trying to push self-sufficiency amid U.S. moves to cut it off from key supplies. Over the past few years, China has tried to boost its semiconductor industry through huge investments and incentives like tax breaks.

But China remains well behind everywhere else and that goes back to the supply chain. SMIC is China's largest foundry, a competitor to the likes of TSMC and Samsung. But SMIC's technology is several years behind that of its Taiwan and South Korean rivals.

And even if it wanted to advance, it's extremely difficult due to U.S. sanctions and actions. Washington put SMIC on a blacklist known as the Entity List last year. That restricts American companies from exporting certain technology to SMIC, holding back the chipmaker due to the key role U.S. firms play in the semiconductor supply chain. Roughly 80% or more of SMIC equipment comes from U.S. vendors, according to Bank of America.

Last year, Reuters reported that the U.S. pressured the Netherlands government to stop the sale of an ASML machine to SMIC. The Dutch firm is the only company that makes the so-called extreme ultraviolet (EUV) machine that is needed to make the most cutting-edge chips. That machine has still not been shipped to China.

"If China wants to manufacture leading edge chips, it is virtually impossible without equipment from the US or allies," Bank of America said in its December note.

"We remain skeptical about a meaningful progress in China's progress due to US restrictions as it is materially behind in IP (intellectual property) and has limited access to IP given the US restrictions," Bank of America said in a separate note last week.

"Our team expects a delay of around 5+ years before it makes a more significant progress."

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taiwan semiconductor manufacturing co ltd

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How Asia came to dominate chipmaking and what the U.S. wants to do about it

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GUANGZHOU, China - If you talk about chipmaking, two companies usually spring to mind - Taiwan's TSMC and South Korea's Samsung Electronics. The two Asian firms combined control more than 70% of the semiconductor manufacturing market. The U.S., which was once a leader, lags behind in this space after monumental shifts in the business models in the semiconductor industry.

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Measures in USA
The USA has started taking its own measures to overcome the semiconductor shortage. Biden signed an executive order on 24th February 2021 to address the chip shortage. There will be a 100-day review on important products like semiconductors, then a wider, more in-depth review of the economy.
https://www.cnbc.com/2021/02/24/biden-signs-executive-order-to-address-chip-shortage-through-a-supply-chain-review.html

The White House, who has been depending on large players in the chip industry and countries like Taiwan, is also planning to spend $50 billion in order to boost chip production in the USA through incentivisation.

https://www.washingtonpost.com/technology/2021/04/29/apple-caterpillar-chip-shortage/

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Measures by Industry Players
Companies in the semiconductor and consumer electronics industries have also started taking their own measures to overcome the shortage.

Intel plans to spend $20 billion on 2 new chip factories in Arizona and plans to build a new plant in Europe if the company gets enough public funding.

https://www.cnbc.com/2021/05/12/the-global-chip-shortage-could-last-until-2023-.html

Huawei had also stockpiled chips for 5G ahead of sanctions imposed by Trump administration to make sure that it can continue supplying its 5G technology.

https://www.bloomberg.com/news/articles/2020-10-22/huawei-outhustles-trump-by-stockpiling-chips-needed-for-china-5g?sref=ctSjKj2N

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Impact on the Consumer Electronics Industry

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Impact on the Consumer Electronics Industry

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Despite many measures being taken, the shortage of semiconductors is still predicted to last at least another year well into 2022. Thus, current measures in place may not be as effective to immediately overcome the current shortage.

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Semiconductors will be in short supply for some time to come yet, according to analysts that monitor the industry.

Today, chips are in everything from PlayStation 5s and toothbrushes to washing machines and alarm clocks. But there's not enough to go around - it's a multifaceted issue that shows no signs of abating, leading some to call the current crisis " chipageddon."

Glenn O'Donnell, a vice president research director at advisory firm Forrester, believes the shortage could last until 2023.

"Because demand will remain high and supply will remain constrained, we expect this shortage to last through 2022 and into 2023," he wrote in a blog.

O'Donnell expects demand for PCs, which contain some of the most advanced chips, to "soften a bit" in the coming year but "not a lot."

Meanwhile, he expects data centers, which are full of computer servers, to buy more chips in the next year after what he describes as a "dismal 2020."

"Couple that with the unstoppable desire to instrument everything, along with continued growth in cloud computing and cryptocurrency mining, and we see nothing but boom times ahead for chip demand," said O'Donell.

Meanwhile, Patrick Armstrong, CIO of Plurimi Investment Managers, told CNBC's "Street Signs Europe" last week, that he thinks the chip shortage will last 18 months. "It's not just autos. It's phones. It's the internet of everything. There's so many goods now that have many more chips than they ever did in the past," he said. "They're all internet enabled."

The car industry has been affected by the global chip shortage more than any other sector.

The world's largest chip manufacturer, TSMC (Taiwan Semiconductor Manufacturing Company), said earlier this month that it thinks it will be able to catch up with automotive demand by June. Armstrong, however, believes that's ambitious.

"If you listen to Ford, BMW, Volkswagen, they all highlighted that there's bottlenecks in capacity and they can't get the chips they need to manufacture the new cars," he said.

Elsewhere, Gartner said on Wednesday that the shortage will persist throughout 2021, adding that the shortage impacts all chip types and that chip prices are rising.

Gartner analyst Alan Priestley told CNBC Thursday that the situation may improve for some sectors in the next six months, but that there may be a "knock-on effect" into 2022.

"It shouldn't go longer," he said. "The industry is putting more capacity in place, but it does take time."

Indeed, Intel, announced in March that it plans to spend $20 billion on two new chip factories in Arizona. Intel has also said it could build a plant in Europe if it gets public funding.

"That stuff is going take two or three years before we start to see that," said Priestley. "But that's really looking to meet future demand."

Meanwhile, the chief executive of German chipmaker Infineon said last Tuesday that the semiconductor industry is in unchartered territory.

Reinhard Ploss told CNBC's "Street Signs Europe" last week that it is "very clear it will take time" until supply and demand are rebalanced.

"I think two years is too long, but we will definitely see it reaching out to 2022," he said. "I think additional capacity is going to come ... I expect a more balanced situation in the next calendar year."

Wenzhe Zhao, director of global economies and strategy at Credit Suisse, said in a note last Wednesday that the recent chip shortages have encouraged inventory hoarding along chip production chains, widening the gap between expanding demand and stagnant supply.

Zhao said that new semiconductor production capacity won't come online until 2022 or later, adding that little can be done to address today's shortage besides adjusting order books, production schedules, and prices.

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The global chip shortage could last until 2023

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Semiconductors will be in short supply for some time to come yet, according to analysts that monitor the industry. Today, chips are in everything from PlayStation 5s and toothbrushes to washing machines and alarm clocks. But there's not enough to go around - it's a multifaceted issue that shows no signs of abating, leading some to call the current crisis " chipageddon."

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Modern smartphones and tablets use the fastest, most high-tech chips but also require more mature chips to perform certain functions, such as operating screen displays.

Lack of chips is slowing down the production of electronic goods.

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How the structures of the semiconductor industry and electronic goods Industry lead to production bottlenecks:

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How the structures of the semiconductor industry and electronic goods Industry lead to production bottlenecks:

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91% of the chipmaking business is based in Asia, in two regions, Taiwan and South Korea which is home to TSMC and Samsung respectively. Hence, these two prominent players had to meet the demand requirements of the rest of the companies.

https://www.bloomberg.com/graphics/2021-semiconductors-chips-shortage/

The demand for electronic products increased in 2020 as everyone shifted to remote learning and work amidst the COVID-19 pandemic. Smartphone companies would have sold much more if not for the semiconductor shortage

https://www.marketwatch.com/story/the-semiconductor-shortage-is-here-to-stay-but-it-will-affect-chip-companies-differently-11618678056

As a result, many large corporations have been affected. Apple, the world’s biggest buyer of semiconductors, delayed the launch of the iPhone 12 by two months due to the shortage of semiconductors. Samsung also delayed the launch of its high-end smartphone despite being the world’s second-largest producer of the chip. Other companies such as Sony and Microsoft also struggled with stock shortages of their PS5 and Xbox products respectively due to the semiconductor shortage.

https://www.theguardian.com/business/2021/mar/21/global-shortage-in-computer-chips-reaches-crisis-point

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Firstly, American firms were cut off from chips made by China’s Semiconductor Manufacturing International Corporation due to the trade war between China and the US. Furthermore, a fire broke out at a Japanese semiconductor plant and factory, and there were curbs in the global transportation system.

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With the U.S. economy expected to gather steam this year as more and more Americans are vaccinated, one of the biggest cautions to consider is whether supply chains will be able to keep up with growing demand. Indeed, concerns about disruptions to supply chains and shortages that have occurred during the pandemic sparked the Biden administration to order a review of critical areas.

A major example is semiconductors. Lead times for many semiconductors are one year out right now, and these devices are in just about everything we use. Business and financial media have detailed how the shortage of semiconductors has caused production cutbacks in the automotive industry: Ford, Toyota, Nissan, VW, and Fiat Chrysler Automobiles (now a part of Stellantis) are among global carmakers that have scaled back output. Other carmakers have announced they'll likely miss their 2021 targets. And it's not just carmakers that are in trouble. The chip shortages are expected to cause widespread shortages of everything, from electronics to medical devices to technology and networking equipment.

As recently reported by Reuters, automakers and medical device manufacturers have asked the Biden administration to subsidize construction of new U.S. semiconductor manufacturing capacity. And in response to the shortages, Taiwan Semiconductor Manufacturing Company (TSMC), the world's largest semiconductor manufacturer, has increased its 2021 capital spending budget to $28 billion. But funding and building a new semiconductor fab is at least a five-year process.

To a great extent, the chip shortage has been a ticking time bomb, building since late last year due to a few (unrelated) supply-chain disruptions. When the Covid-19 pandemic caused a precipitous drop in vehicle sales in spring 2020, automakers cut their orders of all parts and materials - including the chips needed for functions ranging from touchscreen displays to collision-avoidance systems. Then in the third quarter, when demand for passenger vehicles rebounded, chip manufacturers were already committed to supplying their big customers in consumer electronics and IT.

Geopolitical factors also played a role, specifically when the Trump administration began tightly regulating sales of semiconductors to Huawei Technologies, ZTE, and other Chinese firms. Those companies began stockpiling chips essential to 5G smartphones and other products. At the same time, American firms were cut off from chips made by China's Semiconductor Manufacturing International Corporation after the federal government blacklisted the firm.

In July, a fire at a Japanese factory cut off supplies of special fiberglass used for printed circuit boards. Then in October, a fire at a Japanese plant belonging to Asahi Kasei Microdevices took advanced sensing devices used in automotive and other industries out of circulation. As of late February, the plant was still down.

As if all these disruptions weren't enough, there have also been constraints in the global transportation system. According to Clear Metal, which monitors over 90% of ocean freight, nearly 7% of ocean freight is not making it out of China ports this quarter. Shortages of shipping containers resulted in companies having to pay premiums for shipping and drove demand towards airfreight. But the airfreight system has been experiencing higher demand due to global shipments of the Covid-19 vaccine even as its capacity has been reduced due to the pandemic-related drop in passenger travel, which has meant that there are fewer passenger planes available to carry freight. In fact, global air-cargo capacity in first quarter of 2021 is 25% less than last year. The grounding of the Boeing 777 fleet with Pratt & Whitney engines following the failure of an engine on a plane over Colorado has further exacerbated capacity constraints.

No one likes to hear "I told you so," but organizations could have done a better job planning for these shortages. Instead, poor decision-making prevailed. For example, aggressive lean inventory practices left many manufacturers vulnerable. As vehicle sales began to rebound in the third quarter, automakers were slow to order more semiconductors and then lost out to more nimble electronics manufacturers that had visibility into the bigger picture and longstanding relationships with semiconductor manufacturers. The electronics manufacturers planned accordingly and secured their supply lines prior to November 2020.

The automotive industry is experiencing another critical market shift that has important supply chain implications: As carmakers increasingly prioritize electric vehicles, cars are becoming electronic devices. This means the automotive industry now must face the competing demands of all other industries, including those in electronics and those adding internet connectivity to their products.

The large manufacturers in automotive and other sectors suffering from the chip shortage need to take a long look at their supply chain strategies and ask themselves: Where have they prioritized cost reduction at the expense of risk management? If they had monitored and mapped their supply chains, would that have alerted them sooner to the semiconductor shortages arising from the fire at a major lower-tier supplier in Japan? How can they tune up their supplier-relationship-management programs to be in a better position the next time a fire or a pandemic cuts off supplies of essential parts?

The pandemic and the chip shortage have made one thing abundantly clear: A flexible, agile supply chain is crucial to navigating the changes and staying resilient.

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Why We're in the Midst of a Global Semiconductor Shortage

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With the U.S. economy expected to gather steam this year as more and more Americans are vaccinated, one of the biggest cautions to consider is whether supply chains will be able to keep up with growing demand. Indeed, concerns about disruptions to supply chains and shortages that have occurred during the pandemic sparked the Biden administration to order a review of critical areas.

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Secondly, there was a shortage in Intel’s chips and declining memory chip prices.
The COVID-19 pandemic resulted in an increase in demand for electronic goods, sparking the growth of new technologies, increasing the demand for semiconductors.

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The global semiconductor shortage is causing headaches for many industries. Manufacturers of PCs, mobile devices, gaming consoles, vehicles, networking devices, and industrial machines are all scrambling to buy enough chips to use in their products amid surging demand for those same products.

Investors looking to navigate this situation and avoid a problematic stock trade would be smart to know what's going on. That starts with being familiar with the six root causes of this ongoing crisis.

1. Intel's big mistakes

(( Intel NASDAQ:INTC), the world's largest manufacturer of x86 CPUs for PCs and data centers, suffered a chip shortage in 2018 after its troubled development of new 10nm chips impacted its production of 14nm chips. It hadn't resolved that shortage when it stumbled again last year by delaying the launch of its new 7nm chips. Intel's missteps caused more PC makers to buy AMD's NASDAQ:AMD) CPUs, putting a strain on its supply.

Unlike Intel, which manufactures its own chips with its internal foundry, AMD outsources the production of most of its chips to ( Taiwan Semiconductor Manufacturing NYSE:TSM), the world's most advanced chip foundry. As a result, AMD's growth and market share gains applied more pressure to TSMC's plants prior to the pandemic.

2. Declining memory chip prices

Meanwhile, memory chip prices soared in 2017 and 2018, but declined in 2019 and 2020 amid sluggish demand from the PC and smartphone markets. In response, top DRAM and NAND chipmakers -- including ( Samsung, SK Hynix, and Micron Technology NASDAQ:MU) -- curbed their output before the pandemic.

3. The COVID-19 crisis

In short, the market was already wobbly when the pandemic started last year. However, the pandemic temporarily disrupted semiconductor shipments as global demand for new mobile devices, PCs, and data center upgrades surged in response to remote work, online learning, and other stay-at-home trends.

Most chipmakers recovered from their initial disruptions, and TSMC stayed online because its most advanced plants in Taiwan weren't affected. Memory chipmakers also quickly ramped up their production again in response to that rising demand.

But the chip sector still couldn't satisfy the market's appetite for new chips. TSMC's fabs have already been running at over-100% utilization over the past 12 months, and it recently announced it would spend $100 billion over the next three years to expand its operations. Intel also recently warned that the global chip shortage could last two more years and would require "immense" investments to resolve.

4. Secular tailwinds

Global demand for chips has generally been cyclical over the past few decades. However, the secular growth of new technologies -- including cloud services, 5G networks, and AI services -- is feeding a "super cycle" of chip upgrades that could last much longer than a traditional cycle.

Connected devices, such as smartphones and cars, require a growing number of chips. ( Skyworks Solutions NASDAQ:SWKS), which produces wireless chips for a wide range of industries, expects each 5G smartphone to use $25 worth of front-end chips, compared to $18 per 4G devices and just $8 per 3G device.

Skyworks also expects nearly three-quarters of all cars to ship with cellular connectivity by 2024. IHS and Deloitte estimate the costs of all electronic components in cars accounted for 45% of their costs in 2020, up from just 18% in 2000, and that ratio could keep rising.

Many chipmakers expected this supercycle to significantly boost their sales prior to the pandemic, but the crisis accelerated many of those trends while temporarily disrupting their shipments. That pressure will likely cause the global chip shortage to drag on.

5. The ongoing tech war

The tech war between the U.S. and China, which intensified under President Donald Trump and is continuing under President Joe Biden, is another pressing issue. The U.S. has already levied sanctions against several big Chinese companies, including SMIC and Huawei, amid national security concerns.

Those sanctions are exacerbating the shortage of advanced chips in China, but they're also spurring the Chinese government to aggressively invest in its domestic chipmakers to reduce its overall dependence on overseas technologies -- which could cause a messy decoupling of the U.S. and Chinese markets.

6. More challenges ahead

The Biden administration recently proposed spending $50 billion to strengthen America's chipmaking sector, but fresh cash probably won't resolve the current chip shortage.

That's because most of the global semiconductor market still relies on overseas companies like the Dutch ( semiconductor equipment maker ASML NASDAQ:ASML), Taiwan's TSMC, and South Korea's Samsung -- which are all arguably more important than most American chipmakers.

Moreover, several recent setbacks -- including a power outage at TSMC, a production pause at Samsung, and a fire at the Japanese auto chipmaker Renesas -- all highlight the fragility of the semiconductor supply chain and its overwhelming dependence on overseas gatekeepers.

What does this shortage mean for investors?

As the semiconductor shortage continues, investors should buy shares of essential companies like ASML and TSMC -- which will profit from elevated demand for their products and services -- while avoiding chip-starved sectors like the auto industry. Investors should also stick with better-run fabless chipmakers like AMD and NVIDIA instead of Intel, which could still struggle with R&D and production issues for the foreseeable future.

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6 Causes of the Global Semiconductor Shortage | The Motley Fool

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The global semiconductor shortage is causing headaches for many industries. Manufacturers of PCs, mobile devices, gaming consoles, vehicles, networking devices, and industrial machines are all scrambling to buy enough chips to use in their products amid surging demand for those same products.

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Smartphone prices have increased due to the shortage of semiconductors and increase in costs of smartphone components such as display panels and batteries.

https://www.bizzbuzz.news/markets/semiconductor-shortage-triggers-rise-in-smartphone-prices-893787

The spike in demand is caused by the pandemic lock downs especially for consumer electronics such as smartphones, laptop and video game consoles. Additionally, It is expected to continue rising due to the introduction of 5G.

The overall demand also caused shortages in chips for consumer electronics such as home appliances

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Everything you need to know about the global semiconductor shortage

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The chip shortage that first hit the car sector, but has since spread to other industries, is not going away any time soon, highlighting the fragility of the global supply chain.

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Industry: Electronic Goods (Consumer Electronics)
The Electronics Industry is made up of companies that manufacture, design, manufacture, assemble, and service electronic products. Consumer Electronics is a major segment of the electronics industry that produces consumer products such as mobile phones and televisions.

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PAT RESEARCH: B2B Reviews, Buying Guides & Best Practices

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All About Electronics Industry: Key Segments, Value Chain, Competitive Advantages and Functions in 2021 - Reviews, Features, Pricing, Comparison - PAT RESEARCH: B2B Reviews, Buying Guides & Best Practices

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The Electronics Industry is made up of companies that manufacture, design, manufacture, assemble, and service electronic products. These products consist of materials, parts, components, subassemblies, and equipment that use the principles of electronics to perform their major functions.

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Higher demand for electronics globally also contributed to the shortage of semiconductors, and this caused a shift in business models to outsource their production, eventually leading to bottlenecks among these chip factories.

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A chip shortage that started as consumers stocked up on personal computers and other electronics during the Covid-19 pandemic now threatens to snarl car production around the world.

On Tuesday, GM said that it would extend production cuts in the U.S., Canada, and Mexico until the middle of March. They join a long list of major automakers, including Ford, Honda and Fiat Chrysler, which have warned investors or slowed vehicle production because of the chip shortage.

But it's not just the automotive industry that's struggling to get enough semiconductors to build their products. AMD and Qualcomm, which sell chips to most of the top electronics firms, have noted the shortage in recent weeks. Sony blamed the chip shortage for why it's so hard to get a PlayStation 5 game console.

Chips are likely to remain in short supply in 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 from 2020's total of $433 billion. That's up from 5.1% growth between 2019 and 2020 -- a notable jump, given how large the absolute numbers are.

Semiconductors are in short supply because of strong demand for electronics, shifting business models in the semiconductor world that created a bottleneck among outsourced chip factories, and effects from the U.S. trade war with China that started under former President Trump.

A huge boom in electronics sales

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

The first wave involved people buying PCs, monitors and other gear for working or going to school remotely. Then, last fall, home entertainment gadgets like game consoles, TVs, smartphones and and tablets started flying off the shelves.

PC sales were up 4.8% in 2020 to 275 million units, with over 10% growth in the holiday season, according to Gartner data. That reversed a years-long decline, and is the highest annual growth in the PC market since 2010.

Other gadgets sold well, too. 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 big demand for game consoles, headphones, and smart home products in 2021.

All these devices include a ton of chips - not just the central processor which can cost tens or hundreds of dollars, but also less expensive little chips for controlling the display, or managing power, or operating a 5G modem.

"The current chip shortage all starts with the unprecedented demand for personal computers and peripherals as the globe worked and attended school from home," said Patrick Moorhead, founder of Moor Insights, a firm that studies the semiconductor industry.

Electronic industry giants that have reported record sales say that they could've been even better if there was enough supply. Apple, which recently reported a blowout $111 billion quarter, told analysts it didn't have enough supply of its new iPhones to meet demand. CEO Tim Cook told Reuters that "semiconductors are very tight."

AMD CEO Lisa Su, which makes the processor at the heart of Sony's and Microsoft's new consoles, said last month that it expects shortages through the first half of the year, at least. "The industry does need to increase the overall capacity levels," Su said.

Business shift to outsourcing slams factories

The shortage is highlighting a structural change in the semiconductor industry. Many of the top semiconductor companies are now "fabless," which means that they only design the chips and the technology in them. Other companies, known as foundries, are largely contracted to actually make the chips.

The foundries are run by companies like 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, they had to get back in line.

Carmakers aren't directly competing with high-tech companies for the same chip supply. Car chips are usually based on older chip manufacturing technologies and don't need the bleeding edge.

But the shortage isn't just in the fastest chips - it's in everything.

"The shortage in the semiconductor industry is across the board," said incoming Qualcomm CEO Cristiano Amon last month. "Not only leading nodes but legacy nodes," referring to chip manufacturing technology.

Cars now include scores of tiny chips, many of which perform functions like power management. Cars also use a lot of microcontrollers, which can control traditional automotive tasks like power steering, or are the brain at the heart of an infotainment system. Car makers also usually use "just-in-time" production, which means they avoid having extra parts in storage.

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

"If the chip that powers the in-car dials or automatic braking are delayed, then so will the rest of the vehicle," Bryce Johnstone, director of automotive segment marketing at chip designer Imagination Technologies previously told CNBC.

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

Tech companies are "the volume guys. They have higher margins. And they never cut down their orders and have long-term contracts with the foundries," Gupta said. "Now that this auto demand peaked faster that the OEMs had expected, autos can't get back in the queue."

The foundries are aware of the issue. TSMC, which is seen as the most advanced and important foundry, said that it was trying to help the auto companies, and said it would spend as much as $28 billion this year to increase its capacity.

"While our capacity is fully utilized with demand from every sector, TSMC is reallocating our wafer capacity to support the worldwide automotive industry," TSMC said in a statement in January.

Car manufacturers also use automotive-grade chips, which are painstakingly "qualified" against binders of industry standards to make sure they're durable and reliable. "It is more difficult for the industry to alternatively transition its production lines and supply chains elsewhere," Trendforce, a consulting group covering the semiconductor industry, wrote in a report last month.

Trump's trade war

Last last year, the U.S. placed restrictions on Semiconductor Manufacturing International (SMIC), the biggest foundry in China, barring it from getting advanced chip manufacturing gear, and making it much harder to sell its finished products to companies with U.S. ties. Customers needed to shift their orders to competitors like TSMC, Gupta said.

SMIC executives acknowledged that the U.S. move has prevented it from using its full capacity when it said geopolitical factors would prevent it from seizing "this year's rare market opportunity," referring to the chip shortage.

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

Stockpiling was also driven by supply concerns as Covid swept across the world. SK Hynix, a major memory chip maker, said last July it saw a surge of sales driven by "growing anxiety about IT supply chain in general."

Some companies that stockpiled chips are reaping the benefits now. Toyota said on Wednesday that it doesn't expect to reduce its rate of production because it had stockpiled four months worth of chips to ride out the shortage. Toyota raised its full-year earnings forecast by 54%.

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Why there's a chip shortage that's hurting everything from the PlayStation 5 to the Chevy Malibu

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A chip shortage that started as consumers stocked up on personal computers and other electronics during the Covid-19 pandemic now threatens to snarl car production around the world. On Tuesday, GM said that it would extend production cuts in the U.S., Canada, and Mexico until the middle of March.