Paul van Gerven
22 March 2021

A perfect storm of supply and demand factors has prompted the electronics industries to start hoarding semiconductors. This obfuscates how big the imbalance between supply and demand really is.

Toyota recently joined a long list of car manufacturers that have been forced to scale down their production output due to a chip shortage. For want of a chip, hundreds of thousands of cars will not be made this year. The supply glut will cut almost 61 billion dollars in revenue from the global automotive industry in 2021, consulting firm Alixpartners estimates.

But it’s not just the car industry that’s suffering. The new Playstation 5 and Xbox consoles will be in short supply until at least the second half of the year. Nvidia is struggling to get enough GPUs that power its graphics cards. Qualcomm can’t keep up with the demand for smartphone processors. Its customer Samsung, warning about a “serious imbalance” in the semiconductor market, is postponing the launch of its flagship smartphone. Even mighty Apple is forced to push out an iPhone release.

In fact, a broad spectrum of chips is getting tougher to find. “Around 500 components used in all of our product portfolios are impacted by the supply shortage issue,” Advantech executive Miller Chang told investors recently. The world’s largest maker of industrial computers noted that lead times for some components, such as audio codec chips and microcontrollers, have gone beyond 50 weeks. Power management chips, Wi-Fi, Bluetooth and LCD drivers have a waiting time of over 20 weeks.

With lead times already at high levels and still increasing, panic buying and double ordering ensues, further squeezing capacity and driving up costs. “It’s a bit like everyone is crazily buying and hoarding toilet paper in a crisis. Everyone is fighting for resources at the same time, and I don’t see a turning point coming yet,” Advantech CEO Ko-Chen Liu said. Many CEOs and analysts concur.

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Credit: Flickr/Rob Bulmahn

Back of the line

Of course, all this is nothing new: the semiconductor industry is notoriously cyclical. It’s impossible to smoothly balance supply and demand because there’s hardly any flexibility in chip manufacturing capacity. Since the cost of manufacturing essentially equals capital costs, all available capacity is utilized as much as possible. Expanding capacity is a carefully planned process that takes years to realize and only a very rich fool would keep some spare capacity around just in case demand increases. Anyone who buys semiconductors knows this, which is why they’re twitchy about lead times or prices increasing.

The current upswing in demand is a particularly dramatic one. Normally, overall semiconductor revenue drops going into the new year, but this January, it actually rose 1.6 percent compared to the month before. According to investment bank UBS, that’s 11 percentage points above the typical seasonal pattern.

So why this chip crunch, why now? The most-cited cause is the pandemic, which fueled demand for working, studying and enjoying oneself at home. For example, the PC was supposed to be dying, but market intelligence firm IDC clocked a 12.9 percent year-on-year increase of PC unit shipments – the highest growth in ten years. And despite supply chain constraints due to virus-mitigating measures, global consumer electronics revenue increased 7 percent last year, according to Strategy Analytics.

IDC PC shipments
IDC expects the momentum of PC shipments in 2020 to carry forward into 2021, forecasting 18.2 percent growth.

But there’s more to it. Many companies started hoarding semiconductor devices as early as May last year, when the US government announced restrictions for any company using American technology supplying Huawei. Additional limitations imposed in September on the world’s fifth-largest foundry, SMIC, exacerbated the uncertainty the US-China trade tensions are creating in the semiconductor market.

In some markets outside the leading-edge realm, fab capacity was already tight, to begin with. All those computers, tablets and 5G smartphones require heaps of ‘humble’ chips to function, such as analog, RF and MEMS devices, display drivers and power management ICs. Many of these are fabbed on 200mm wafers, and 200mm fab capacity has been in short supply since 2015. Device makers have been slow to expand capacity, partly because of an equipment shortage. Ever since the mid-2020 rebound, demand for (second-hand) 200mm tools has been surging, according to NH Investment & Securities.

Finally, incidental occurrences are also contributing to the current supply-demand imbalance. With bitcoin’s price soaring, GPUs used for crypto mining have been flying off the shelves. Power outages following a fierce winter storm in Texas forced chip plants of Samsung, NXP and Infineon to shut down. In the automotive sector, the current shortage is partly the result of poor planning: companies were quick to cancel and slow to reorder, putting the automotive supply chain at the back of the line at foundries. Recently, water shortages for Taiwan’s chip factories are making people nervous, too.


It will take a while before things start to settle. Though estimates vary, the consensus among industry watchers seems to be that supply will have caught up with demand in 3-4 quarters. Another 1-2 quarters will be spent to replenish inventories at customers and distribution channels. It might not be a bad idea to start Christmas shopping early this year if you’ve got your heart set on a specific gadget, because prices are likely to rise and some products might be hard to find.

On the other hand, some are already worried about a bust. Hoarding may have created ‘phantom’ demand, causing excess inventories and supply gluts in the future. “While things appear red-hot for semis in the short term, we’re growing more cautious over the long-term outlook as we believe the industry may be over-shipping to true demand,” analyst Chris Rolland at Susquehanna warned in a recent note to investors.