How will the global chip shortage affect the rest of your year?

How will the global chip shortage affect the rest of your year?
Micron Technology’s solid-state drive for data center customers is presented at a product launch event in San Francisco, U.S., October 24, 2019. REUTERS/Stephen Nellis/File Photo
This timeline varies a little bit depending on who you ask, but the consensus is that the chip shortage won’t be over before the end of the year.

What’s the global chip shortage?

  • Microchips, which are also called semiconductors, are in high demand because there’s a big chip shortage right now.
  • According to Ray Zinn, founder of Micrel Inc., which was acquired by one of the world’s biggest semiconductor producers Microchip Technology Inc. in 2015, these microchips are in practically every electronic device we use.
  • “If you got a power cord connected to it, or a battery, or if it’s got any electrical interface that is probably now managed by a semiconductor,” Zinn said to TMS in an interview.
  • “So you can kind of tell if it’s, if it has any electrical aspect to it, then that’s impacted by the semiconductor industry.”
  • When the pandemic hit, the plants that produce semiconductors (called “fabs,” if you want to use the industry lingo) had to either close down temporarily or implement social distancing measures, which ultimately slow production.
  • It’s important to remember that you can’t just take one step out of the production line on these sort of things. It’s like what would happen if a car maker didn’t put on the fourth tire.

What’s going on with consumer prices?

  • As Zinn said, these chips are in practically all modern-day electronics.
  • As the United States economy recovers from the pandemic, there has been a broad uptick in inflation. But, because of the supply chain issues and the chip shortage, this was seen more so in the prices of electronics, which have seen the biggest increases in prices in over a decade these past few months.
  • Prices of some laptops have jumped US$50 over the past six months, and industry experts are generally blaming the shortage.
  • And Zinn estimates that prices could increase by as much as 60% because of inefficiencies in the semiconductor supply chain.
  • “You go back to the old supply and demand curve,” said Zinn. “If you increase the supply, then of course, the price will come down. But if the supply lags demand, then prices will continue to go up.”
  • During an earnings call in late May of this year, Dell Technologies Inc. Vice President and Chief Financial Officer Thomas Sweet said, “I do think as we think about component cost increases, we’ll adjust our pricing as appropriate.” And, according to Bernstein Research, HP Inc. raised prices of laptops by 8% and printers by over 20% in one year to reflect the increase in their costs.

Does this affect the availability of products?

  • Yep. Supply for some tech products, such as computer graphics cards (GPUs), have been extraordinarily low throughout the pandemic.
  • “I waited for 11 hours outside and only knew about the restock because of a news article posted the day prior,” said Aiden Semet, a computer enthusiast in Colorado who stood in line overnight to purchase a GPU.
  • “GPUs are really hard to get,” said Zane Beasecker, Semet’s roommate and fellow computer enthusiast. “We had to wait in line all night just to get our hands on a newer card.”
  • This is largely because the supply for computers, cameras and work from home equipment shot up as the production capacity was going down.
  • The other challenge that people have to face, especially when it comes to things like Christmas gifts for friends and family, is that there might not be as much supply in general.

What about price ranges?

  • According to retailers and company executives, a lot of manufacturers are prioritizing premium products because of the higher margins, which makes it really hard to find budget-priced goods, pushing the prices of budget goods up as well.
  • “A combination of inflation and scarcity is pushing manufacturers toward higher-priced goods. If a manufacturer can’t get enough parts to make all the products they’d like, they may make more of a premium product to protect their profitability," explained David Garfield, the head of the consumer-products practice at consulting firm AlixPartners.
  • This is also the case for the auto industry, with car manufacturers like Ford Motor Company focusing more heavily on premium vehicle models that have a higher margin.
  • Not only that, but during this time many premium models produced by carmakers have made concessions in the number of features they have. For example, Nissan Motor Co., Ltd. didn’t install the car navigation systems for thousands of vehicles this year.
  • On the other hand, prices have also changed because of the value change for us consumers during the pandemic. For example, because we are now spending more time outside, we would pay more for a premium barbecue grill. Also, with millions working from home, the demand for better tech devices and gadgets increased.

What’s next?

  • It is important to note that there are several contributing factors to this whole price hike. Manufacturers cutting back on lower-priced models, inflationary pressures from an economic recovery in the US, and the chip shortage and disrupted supply chains are all factors at play. The real question is when will the semiconductor supply chain return to normal.
  • Tesla Inc. chief executive officer Elon Musk estimates that there will be good semiconductor capacity at some point in 2022.
  • “There’s a lot of chip fabrication plants that are being built and I think we will have good capacity by next year,” Musk said at Italian Tech Week in Turin in late September.
  • Zinn agrees, saying, “I don’t think Musk is too far off. I think, probably in the middle of next year, at the earliest, is kind of what I would say.”
  • But not everyone is as optimistic. Research and advisory company Forrester Vice President and Research Director Glenn O’Donnell thinks it could continue into 2022 and maybe even 2023.
  • So, this timeline varies a little bit depending on who you ask, but the consensus is that the shortage won’t be over before the end of the year. “There are going to be some shortages,” Zinn said. “[With] a little over two months until Christmas, I can easily see that being an issue this year.”