Filed Under: Tech

Chip shortage takes bite out of autos and Apple

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As Americans flock to the stores this Black Friday they can expect to pay up to 10.5% more according to the National Retail Foundation.  One big reason is a growing chip shortage. It’s to blame for the price of new cars skyrocketing 12% the past year and has limited the supply of coveted electronics, like gaming consoles and iPhones. Experts say the semiconductor crunch, which started in 2020, will take years to resolve.

What is a semiconductor?

“You can sort of think about semiconductors as the brains that power pretty much everything you use everyday,” said Stacy Rasgon, a semiconductor analyst at Bernstein Research.

Without semiconductors, Rasgon said, “There’s no cars, there’s no planes, there’s no refrigeration, there’s no air conditioning, there’s no television, there’s no communication, there’s no satellites, there’s nothing.”

But life with too few chips is the world we are living in today, and the automotive industry knows that better than others. The chip shortage is expected to cost it $210 billion in revenue in 2021.

Why the auto industry is hit the hardest

Syracuse University professor and supply chain expert Patrick Penfield explained that the chip crisis the auto industry is facing is somewhat self-inflicted.

“When COVID first hit in March and April of last year, the car manufacturers actually canceled a whole bunch of orders for semiconductor chips,” Penfield explained. “And then when demand picked up in June or July, they tried to reorder.”

But by then, Penfield said, the car manufacturers had to go to the back of the line. And that line was getting a lot longer than normal.

Chip demand is ‘off the charts’

According to an analysis Rasgon published in September, sales in the semiconductor industry grew 6% last year during the COVID-19 pandemic and are on pace to grow well over 20% in 2021.

“Demand is absolutely off the charts,” Rasgon added.

When people started staying home during the COVID-19 pandemic, they bought more electronics and upgraded their current systems. They spent a lot more money on things that need chips.

Now lead times — that’s the time it takes from when a company orders semiconductors to when they get it in hand — have ballooned from under a few months to nearly half a year on average. That’s why experts say the shortage isn’t ending anytime soon.

Penfield said it could drag through at least 2023 or 2024.

“Part of it is because the demand keeps growing,” he said. “And so we just can’t build enough capacity to meet demand right now.”

Why it’s hard to meet demand

“A leading-edge factory could cost between $10 and $20 billion for one factory,” Rasgon said. “So this is one reason we didn’t massively overbuild a bunch of it. You don’t dig a hole and throw $20 billion into it and then sit around and wait for customers to show up, you build out capacity as you see demand.”

Today about 75% of the world’s chip manufacturing happens in Asia, whereas the U.S. accounts for just 12% of global production.

“I’m hopeful that the big lesson learned here is that in the United States, we produce more of our own chips so that way we can shorten lead times and be a little more self-sufficient versus dependent on other countries in the world to produce chips for us,” Penfield said.

The Biden administration has proposed spending $52 billion to boost domestic chip production, but that proposal has so far stalled in the House of Representatives.

The bottom line

Because it can take a year or more to build a new semiconductor foundry, the shortage will stick around for a lot longer. And now, in late 2021, the impact has spread from mostly autos to all types of electronics, just in time for the holidays.

“So cell phones, laptops, any type of electronics that you’re going to want to buy for your kids, PlayStations, they’re going to be limited in supply,” Penfield said.

His advice is to buy electronics early and wait a year or more to buy a car if you can.

SIMONE DEL ROSARIO: TALK ABOUT A STICKER SHOCK. THE AVERAGE PRICE OF A NEW CAR HAS GONE UP 12 PERCENT THE PAST YEAR.

HOPING TO BUY A GAMING CONSOLE FOR CHRISTMAS? GOOD LUCK FINDING ONE.

AND APPLE MIGHT HAVE TO SLASH ITS BRAND NEW IPHONE 13 PRODUCTION BY UP TO 10 MILLION PHONES.

WHAT’S HAPPENING? IT ALL COMES DOWN TO A CHIP CRUNCH. NO, NOT THAT KIND OF CHIP.

THIS KIND. THEY’RE ALSO CALLED SEMICONDUCTORS – AND THERE’S A MASSIVE SHORTAGE.

STACY RASGON: YOU CAN SORT OF THINK ABOUT SEMICONDUCTORS AS LIKE THE BRAINS THAT POWER PRETTY MUCH EVERYTHING YOU USE EVERY DAY.

SIMONE DEL ROSARIO: STACY RASGON IS A SEMICONDUCTOR ANALYST. HE PAINTS A GRIM PICTURE OF WHAT LIFE WOULD BE LIKE WITHOUT THESE BRAINY CHIPS.

STACY RASGON: THERE’S NO CARS, THERE’S NO PLANES, THERE’S NO REFRIGERATION, THERE’S NO AIR CONDITIONING, THERE’S NO TELEVISION, THERE’S NO COMMUNICATION. THERE’S NO SATELLITES, LIKE THERE’S NOTHING.

SIMONE DEL ROSARIO: BUT LIFE WITH TOO FEW CHIPS – THAT’S THE WORLD WE’RE LIVING IN NOW. AND NO ONE IS MORE IMPACTED THAN THE AUTO INDUSTRY. THE CHIP SHORTAGE IS EXPECTED TO COST IT $210 BILLION IN REVENUE THIS YEAR.

SUPPLY CHAIN EXPERT PATRICK PENFIELD EXPLAINS HOW IT’S SOMEWHAT SELF INFLICTED.

PATRICK PENFIELD: WHEN COVID FIRST HIT IN MARCH AND APRIL OF LAST YEAR, THE CAR MANUFACTURERS ACTUALLY CANCELED A WHOLE BUNCH OF ORDERS FOR SEMICONDUCTOR CHIPS. AND THEN WHEN THEIR DEMAND PICKED UP IN JUNE OR JULY, THEY TRIED TO REORDER.

SIMONE DEL ROSARIO: BUT BY THEN, HE SAYS THEY HAD TO GO TO THE BACK OF THE LINE. AND THAT LINE WAS A LOT LONGER THAN NORMAL.

PATRICK PENFIELD: IT’S JUST MORE DEMAND THAN WE’VE EVER SEEN.

STACY RASGON: DEMAND IS ABSOLUTELY OFF THE CHARTS.

SIMONE DEL ROSARIO: ALSO BECAUSE OF COVID – WHEN PEOPLE STARTED STAYING HOME, THEY BOUGHT MORE ELECTRONICS, UPGRADED THEIR SYSTEMS, SO A LOT MORE MONEY WAS SPENT ON THINGS THAT NEED CHIPS.

AND NOW LEAD TIMES – -THAT’S THE TIME IT TAKES FROM WHEN A COMPANY ORDERS SEMICONDUCTORS TO WHEN THEY GET IT IN HAND — THAT’S GONE FROM A FEW MONTHS TO NEARLY HALF A YEAR!

THAT’S WHY EXPERTS SAY THIS SHORTAGE ISN’T ENDING ANYTIME SOON.

PATRICK PENFIELD: I DON’T SEE TILL MAYBE THE END OF 2023 OR 2024, FOR A LONG TIME. AND PART OF IT IS BECAUSE THE DEMAND KEEPS GROWING. AND SO WE JUST CAN’T BUILD ENOUGH CAPACITY TO BE ABLE TO MEET DEMAND RIGHT NOW.

SIMONE DEL ROSARIO: SO IF THIS HAS BEEN A PROBLEM SINCE 2020, WHY HAVEN’T WE ALREADY BUILT UP CAPACITY TO FIX IT?

STACY RASGON: A LEADING-EDGE FACTORY COULD COST BETWEEN 10 AND $20 BILLION FOR ONE FACTORY. SO THIS IS ONE REASON THAT WE DIDN’T MASSIVELY OVERBUILD A BUNCH OF IT. YOU DON’T DIG A HOLE AND THROW $20 BILLION INTO IT AND THEN SIT AROUND AND WAIT FOR CUSTOMERS TO SHOW UP, YOU BUILD OUT CAPACITY AS YOU SEE DEMAND.

SIMONE DEL ROSARIO: TODAY ABOUT 75% OF THE WORLD’S CHIP MANUFACTURING HAPPENS IN ASIA, WHEREAS THE U-S ACCOUNTS FOR JUST 12%.

PATRICK PENFIELD: I’M HOPEFUL THAT THE BIG LESSON LEARNED HERE IS THAT IN THE UNITED STATES THAT WE PRODUCE MORE OF OUR OWN CHIPS, SO THAT WAY, WE CAN SHORTEN LEAD TIMES AND BE A LITTLE MORE SELF-SUFFICIENT VERSUS DEPENDENT ON OTHER COUNTRIES IN THE WORLD TO PRODUCE CHIPS FOR US.

SIMONE DEL ROSARIO: BUT BECAUSE IT CAN TAKE A YEAR OR MORE TO EVEN BUILD A SEMICONDUCTOR FOUNDRY, WE’RE IN THIS MESS FOR A WHILE.

AND THE IMPACT HAS SPREAD FROM MOSTLY AUTOS TO ALL TYPES OF ELECTRONICS. JUST IN TIME FOR THE HOLIDAYS.

PATRICK PENFIELD: SO CELL PHONES, LAPTOPS, ANY TYPE OF ELECTRONICS THAT YOU’RE GOING TO WANT TO BUY FOR YOUR KIDS PLAYSTATIONS, THEY’RE GOING TO BE LIMITED IN SUPPLY.

SIMONE DEL ROSARIO: WHAT PRODUCT HAVE YOU BEEN TRYING TO BUY – BUT JUST CAN’T FIND? LET ME KNOW IN THE COMMENTS.

As Americans flock to the stores this Black Friday they can expect to pay up to 10.5% more according to the National Retail Foundation.  One big reason is a growing chip shortage. It’s to blame for the price of new cars skyrocketing 12% the past year and has limited the supply of coveted electronics, like gaming consoles and iPhones. Experts say the semiconductor crunch, which started in 2020, will take years to resolve.

What is a semiconductor?

“You can sort of think about semiconductors as the brains that power pretty much everything you use everyday,” said Stacy Rasgon, a semiconductor analyst at Bernstein Research.

Without semiconductors, Rasgon said, “There’s no cars, there’s no planes, there’s no refrigeration, there’s no air conditioning, there’s no television, there’s no communication, there’s no satellites, there’s nothing.”

But life with too few chips is the world we are living in today, and the automotive industry knows that better than others. The chip shortage is expected to cost it $210 billion in revenue in 2021.

Why the auto industry is hit the hardest

Syracuse University professor and supply chain expert Patrick Penfield explained that the chip crisis the auto industry is facing is somewhat self-inflicted.

“When COVID first hit in March and April of last year, the car manufacturers actually canceled a whole bunch of orders for semiconductor chips,” Penfield explained. “And then when demand picked up in June or July, they tried to reorder.”

But by then, Penfield said, the car manufacturers had to go to the back of the line. And that line was getting a lot longer than normal.

Chip demand is ‘off the charts’

According to an analysis Rasgon published in September, sales in the semiconductor industry grew 6% last year during the COVID-19 pandemic and are on pace to grow well over 20% in 2021.

“Demand is absolutely off the charts,” Rasgon added.

When people started staying home during the COVID-19 pandemic, they bought more electronics and upgraded their current systems. They spent a lot more money on things that need chips.

Now lead times — that’s the time it takes from when a company orders semiconductors to when they get it in hand — have ballooned from under a few months to nearly half a year on average. That’s why experts say the shortage isn’t ending anytime soon.

Penfield said it could drag through at least 2023 or 2024.

“Part of it is because the demand keeps growing,” he said. “And so we just can’t build enough capacity to meet demand right now.”

Why it’s hard to meet demand

“A leading-edge factory could cost between $10 and $20 billion for one factory,” Rasgon said. “So this is one reason we didn’t massively overbuild a bunch of it. You don’t dig a hole and throw $20 billion into it and then sit around and wait for customers to show up, you build out capacity as you see demand.”

Today about 75% of the world’s chip manufacturing happens in Asia, whereas the U.S. accounts for just 12% of global production.

“I’m hopeful that the big lesson learned here is that in the United States, we produce more of our own chips so that way we can shorten lead times and be a little more self-sufficient versus dependent on other countries in the world to produce chips for us,” Penfield said.

The Biden administration has proposed spending $52 billion to boost domestic chip production, but that proposal has so far stalled in the House of Representatives.

The bottom line

Because it can take a year or more to build a new semiconductor foundry, the shortage will stick around for a lot longer. And now, in late 2021, the impact has spread from mostly autos to all types of electronics, just in time for the holidays.

“So cell phones, laptops, any type of electronics that you’re going to want to buy for your kids, PlayStations, they’re going to be limited in supply,” Penfield said.

His advice is to buy electronics early and wait a year or more to buy a car if you can.

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