Zhou Xiaoyang: Why is there such a shortage of chips in the world?

Since the beginning of 2020, the world has gradually experienced a chip shortage, which has intensified. How serious is the "chip shortage" problem? The CEO of GlobalFoundries Semiconductor said that the company's chip production capacity has been fully booked until the end of 2023. Moreover, according to his prediction, the "chip shortage" problem cannot be completely solved in the next 5 to 10 years, and the global semiconductor supply chain may be in a tight supply situation for a long time. The same situation has occurred in other wafer foundries. The foundry fee has increased, and the reserved capacity needs to be prepaid in part or in full. The production capacity for the next one or two years has been fully booked.

The problem of "chip shortage" is fully reflected in the automotive industry. According to data from forecasting agency AFS (AutoForecast Solutions), as of November 14, 2021, the global automotive market has reduced production by 10.097 million vehicles due to chip supply shortages. Among them, the cumulative production reduction in Europe this year is 2.859 million vehicles; the cumulative production reduction in Asia this year is 3.677 million vehicles (of which the production reduction in the Chinese market is 1.981 million vehicles); the cumulative production reduction in North America this year is 3.152 million vehicles. In addition, according to AFS's forecast, the global automotive market may reduce production by 11.263 million vehicles this year. Some car manufacturers even plan to deliver "shortweight" products: Ideal Auto allows users to choose whether to deliver the 3-radar version lacking 2 radars in advance or wait until December to deliver the complete 5-radar version; Xiaopeng Motors issued an announcement that if the owner chooses to install the radar after picking up the car, he will receive the XžPILOT software for free, and the radar will be installed in batches starting from March 31, 2022; Tesla has delivered models in the US market that lack the rear Typc-C interface (with reserved holes) and mobile phone wireless charging plates, and plans to install them in batches starting in December.

So, why is there a sudden chip shortage that is so fierce and unprecedented? Is it because global demand has suddenly increased, and the increase in global chip production capacity/output cannot keep up with the increase in demand? What exactly is the problem?

1. Overview of the demand side in the past two years

Among all terminals that use chips, mobile phones have the greatest demand for chips (because first, each mobile phone uses a lot of chips; second, mobile phones have the largest production and sales volumes), followed by computers (including tablets), home appliances, automobiles, etc.

1. Mobile phone demand side

Table 1 shows the sales changes of mobile phones, the largest consumer of chips.

Table 1: Changes in global mobile phone sales

It can be seen from Table 1 that if we only look at the sales changes in the third quarter of each year over the past three years, the global annual average growth rate in the past two years has been only 2.11%. Taking into account the accuracy of statistics and the volatility of each quarter, and taking into account the annual chip technology iteration and increase in storage capacity, the increase in chip value demand should be less than 10%.

2. Computer demand side

Table 2 shows the shipment volume and year-on-year growth rate of the top five traditional PC manufacturers in the world in 2020.

Table 2: Global PC shipments 2019 VS 2020

Table 3 shows the global shipments (market share and annual growth) of desktop computers, notebook computers, and workstations.

Table 3: Global PC shipments 2021Q2 vs 2020Q2

It can be seen that the annual growth rate of the computer industry in 2020 compared with 2019, and the annual growth rate of Q2 2021 compared with Q2 2020, is about 13%. Considering that the sales volume of computers is about one-quarter of that of mobile phones, this growth rate has little impact on chip demand.

3. Automobile demand side

In 2021, automobile production will be most in need of chips. Table 4 shows the global automobile group sales ranking in 2020.

Table 4: 2020 Global Automobile Group Sales Ranking

International credit rating agency Standard & Poor's recently released a report in July 2021, raising its growth forecast for the global automotive industry. It is expected that global auto sales in 2021 will be about 83 million to 85 million, an increase of 8% to 10%. Standard & Poor's analysis shows that after being severely hit by the epidemic in 2020, the global auto industry has gradually accelerated its recovery, especially since the second half of 2020, some countries have adopted relevant support policies and stimulus measures, which has driven auto sales.

   From Table 4 and the above statements, the annual automobile sales in 2021 are basically unchanged compared with 2019. Of course, the demand for computing power and power chips for new cars has increased significantly. Similarly, the growth of other large chip users such as home appliances was also moderate in 2020 and 2021.

To sum up, from the demand side of chips, the total demand for chips, converted into how many 8-inch wafers are needed, is still quite mild in 2020 and 2021.

2. Chip supply situation in the past two years

Among the global semiconductor companies, 17 are expected to have sales of more than $10 billion in 2021, as shown in Figure 1. These include six fabless companies (Qualcomm, Nvidia, Broadcom, MediaTek, AMD, and Apple) and one pure foundry (TSMC). Another three semiconductor companies (AMD, NXP, and Analog Devices) will join the list of "super suppliers" worth watching in 2021. 

Table 5: Sales of major semiconductor companies

Overall, super suppliers' sales are expected to increase by 26% in 2021 compared to 2020. Assuming that 70% of the revenue growth comes from price increases and 30% from increased supply, the average supply increase over the past two years is 7.8%, which fully or almost fully supports the demand for chips in the terminal market growth over the past two years.

So, why is there a global chip shortage? Why is the chip shortage so serious?

3. The origin of chip shortage

1. Huawei's business was sanctioned. On September 15, 2020, the US ban on Huawei came into effect. At that time, chip companies using US technology will not be allowed to supply Huawei without permission. Major international suppliers worked at full capacity to prepare for Huawei before the sanctions came into effect (a large part of their production capacity was allocated to Huawei), which affected the supply of chips to other customers and caused supply tensions;

2. The high prices of cryptocurrencies such as Bitcoin have led to a surge in demand for mining machines and mining machine chips (including GPUs). The demand for advanced wafer foundry capacity accounts for more than 10% of TSMC and other companies. Moreover, mining chip foundries are not sensitive to prices and even require 100% prepayment, which once squeezed out the capacity demand of other normal terminals for foundries, further causing supply tensions;

3. Due to the US sanctions on Huawei, the top mobile phone suppliers have accurately predicted that Huawei's mobile phone supply and sales will plummet. Each of them (Samsung, Apple, Xiaomi, OPPO, vivo) has formulated an aggressive strategy to seize Huawei's market share and actively stock up on chips and mobile phone terminals, preparing for a big fight. The stocking quantity of the top five companies is far greater than the reduction in Huawei's mobile phone sales, making the chip supply situation even worse;

4. Due to the COVID-19 pandemic and other natural disasters, world-renowned chip suppliers have been forced to suspend or reduce production from time to time. Although the percentage is small, it has a huge psychological impact on the industry;

5. Many companies, especially car companies and computer manufacturers, learned from Toyota's experience and implemented JIT (just-in-time supply, zero inventory). Affected by the above factors, they were forced to adjust their strategies and change the zero inventory target to a half-year inventory target. This is equivalent to increasing the demand of the entire industry by 50%/year, which is something that the supply chain of any industry cannot bear!

6. Under the tense situation of supply and demand in the entire industry, middlemen also began to hoard goods and increase prices, making the entire industry extremely difficult.

To sum up, the overall global chip shortage is not caused by a surge in overall demand. The major factors causing the shortage are gradually disappearing or have disappeared. In addition, the world is also actively increasing production capacity. The cycle of increasing production capacity is about 12 months (with existing factories) to 36 months (starting from infrastructure construction). Considering that general international manufacturers will reserve a certain area of ​​factory buildings (one of the authors’ former world-leading employers stipulates that when the factory utilization rate is predicted to be >85%, it is necessary to start planning to build a new factory), as the channel supply tension eases, channel stockpiles will gradually be released. The overall global chip shortage will definitely be resolved in 2022, or even faster.

4. Shortage of automotive chips

Compared with the overall shortage of the entire integrated circuit industry, the chip shortage in the automotive industry has different reasons. As can be seen from Table 4, global automobile sales in 2020 have a large drop of about 15% due to the epidemic. Global automobile manufacturers have adopted the concept of JIT and have reduced chip orders on a large scale. However, the supply of chips in other consumer industrial fields is extremely tight. Therefore, most chip suppliers have allocated their production capacity to non-automotive demand. However, when the demand of automakers increased in 2021, it was too late to increase orders. In addition, since the certification cycle of automotive chips is 12 to 18 months, car manufacturers cannot change chip models and suppliers in time, resulting in a shortage of automotive chips, which cannot be alleviated in the short term. Furthermore, in order to be on the safe side, automakers have also begun to increase inventory under possible conditions, but each company has shortcomings in stocking, and the stock is not complete. At the same time, due to the explosive growth of new energy vehicles, the demand for automotive chips, especially power chips, has exploded, which cannot be alleviated in a short period of time. Therefore, automotive chips, especially automotive power chips, cannot be alleviated within 2-3 years.