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When will the chip shortage end?

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This week both the US government and the EU acted to try to gain leadership and market share in the electronic chip market. There’s no short term solution to chip shortages and no improvement expected in the next six months. When will the chip shortage end? Looking further ahead, I believe the shortages should ease. Here’s my understanding of the situation and what might happen next.

The US makes about 10% of the world’s electronic chips. Their Commerce Department has reported that the demand for chips is now 20% higher than pre-pandemic levels. This is one reason why chip suppliers are struggling to deliver.

I think it’s well-known that Covid-19 and social distancing and the slowdown it caused in automotive sector paused the flow of chips to that part of the manufacturing economy. Chip shortages affected motor manufacturing particularly hard. This is because, according to Rudiger Scheel of Murata, there can be 5000 MLCCs (multi-layer ceramic capacitors) in one car, and maybe 10,000 – 20,000 in a Tesla 3.

Mixed reactions in manufacturing

Feelings seem to be mixed within industry. Some producers have prospered during the last two years, and their sales managers and shareholders are happy. But not everyone has been so fortunate.

The shortage of components impacts the manufacture of other goods and is causing shortages in consumer markets. Manufacturers of appliances or devices who usually hold several weeks stock will have reduced that to just a few weeks. No improvement is expected in the next six months.

Some manufacturers have been completely starved of essential components, which has been hugely damaging. It has left some companies unable to function normally in their markets. There are stories of impossibly long lead times and nobody knows when the chip shortage might end.

Where have all the chips gone?

Some analysts attribute the shortage of components to the rapid increase in homeworking during 2020. Huge numbers of people suddenly needed more powerful  PCs at home to continue their office work in the remote environment. Videogaming and remote gaming increased during the Pandemic and the lockdowns, and will have added to the demand for higher specification PCs.

AMD’s numbers confirm this. Their chip sales show a sharp rise in Q4 2021, up 49% on 2020 for PCs, gaming, and datacentres. This includes PlayStations and Xboxes.

The growth in cryptocurrencies might be another factor, because they are notorious for requiring massive processing power.

While the demand for processors increased, production did not. Most of the companies that produce chips are fabless and use a limited number of production sites which are running at or close to full capacity. There is nowhere else to produce the same components. This is why the lead times on chips have lengthened so much. Waiting times of a year or 18 months are not surprising now, and some parts are simply unavailable. It is not just microchips that are affected, other electronic and embedded components are affected too. It’s also affecting  capacitors, antennas and the raw materials used in circuit boards.

Anecdotally, we hear that organisations may be placing dual orders for parts, and that distributors are stocking up and holding larger stocks than usual. Nobody knows how many parts are held up in the supply chain.

IT analysts confirm this

At the end of last year IT analysts Context reported that notebook sales through European distribution performed very well towards the end of 2021. Importantly, notebook sales rose and desktop sales fell. This is because the flexible mobile workforce moved to notebook computers.  There were also huge one-off deals in laptops for remote schooling across Europe during Covid, and growing use of  notebooks for rendering, 3D animation, CAD, data analysis and video editing.

In the small-to-medium business market, sales of wireless access points and hotspots saw average selling prices rise by around 20% between January 2021 and October 2021. This may be related to the growth in cloud computing and the need to be online so much during Covid. Sales of Wi-Fi 6 appliances also shot up. Analysts think this growth will continue at 32.3% CAGR until 2027.

The server market is not the same

Contrastingly, the widespread move to hybrid working in 2020 and 2021 did not help the server part of the market, it probably added to the decline. Now that so many businesses are allowing flexible working, they are using less office space and fewer servers on premises.

This leaves the server and storage markets struggling with their revenues below 2019 levels, but this was already coming before Covid arrived. The move to the Cloud was already a strong trend, and companies were decommissioning their in-house data servers and moving to move to cloud-based solutions.

Why demand for chips could cool

Here is why I think the demand for chips will ease. A combination of exceptional one-off events probably contributed to the current shortages. They were Brexit, the grounding of the Evergiven ship, Covid-19 and the political stand-off between East and West. All these events combined to create a perfect storm. We’d be very unlucky if they are repeated.

Much of the demand for IT and components was driven by the unprecedented changes in the work environment brought by Covid. This will recede if as we hope the virus poses less threat.

Finally, the large investments in new laptops and devices made in the last two years could mean that demand will be lower this year. There’ll be less demand from corporates simply because so many people already have a relatively new device, and those sales that boomed during Covid could fall back to a quieter replacement pattern.

Covid did however push some companies to digitise more processes and services. That trend is not likely to go away, the evolutionary growth of new technology should continue.

The will to increase chip production

The extreme shortages present a clear market opportunity and more players and nations are keen to enter the chip market. The US and the EU are acting because chip production is strategically important for developed economies. However the investments need to be in the billions of dollars. Intel plans to invest 20 billion USD in new semiconductor plants in Ohio, to begin production in 2025.

The US wants to become self-sufficient in ICs and their government is discussing an investment of 52 billion USD to boost the American chip industry and create hundreds of thousands of jobs.

Similarly in the EU, Ursula von der Leyen is talking about investing 48 billion Euros to secure 20% of the chip market for Europe, effectively quadrupling Europe’s production of ICs.

Neither government leader has gained agreement yet, but let’s hope they succeed and create new capacity to produce chips in the next 3-5 years. Increasing the supply should bring prices down.  If these plans come to fruition the dynamics of the world’s chip market will be transformed in five years’ time.

I am working as a copywriter and PR consultant in the electronics sector. 

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