Analysis | Why the World Is Short of Computer Chips, and Why It Matters

1. Why are there shortages?

* The stay-at-home era: This pushed chip demand beyond levels projected before the pandemic. Lockdowns spurred growth in sales of laptops to the highest in a decade. Home-networking gear, webcams and monitors were snapped up as office work moved out of the office, and Chromebooks were hot as “school” left the school. Sales also jumped for home appliances from TVs to air purifiers, all of which now come with customized chips.

* Fluctuating forecasts: Automakers that cut back drastically early in the pandemic underestimated how quickly car sales would rebound. They rushed to re-up orders late in 2020, only to get turned away because chipmakers were stretched supplying computing and smartphone giants like Apple Inc.

* Stockpiling: PC makers began warning about tight supplies early in 2020. Then around mid-year, Huawei Technologies Co. — a Chinese smartphone maker that also dominates the global market for 5G networking gear — began building up inventory to ensure it could survive U.S. sanctions that were set to cut it off from its primary suppliers. Other companies followed suit, hoping to grab share from Huawei, and China’s imports of chips climbed to almost $380 billion in 2020, up from $330 billion the previous year.

* Disasters: A bitter February cold snap in Texas led to power outages that shut semiconductor plants clustered around Austin; it was late March before Samsung’s facilities there were back to normal. A plant in Japan run by Renesas Electronics Corp., a major provider of automotive chips, was damaged by fire in March, disrupting production for weeks. And Taiwan suffered its worst drought in decades, raising concerns that manufacturing could be affected.

Chip shortages are expected to wipe out $61 billion of sales for carmakers this year, with production of a million vehicles delayed in the first quarter alone. Samsung warned in March it saw a “serious imbalance” in supply and demand globally. TSMC forecast in April the shortages could extend into 2022. Broadband providers in Europe were facing delays of more than a year when ordering internet routers. Apple was said late last year to be grappling with a shortage of chips that manage power consumption in iPhones. Products such as gaming consoles that were in short supply could remain so.

It’s the thing that makes electronic items smart. Made from a conductive material, usually silicon, the chip performs a variety of functions. Memory chips, which store data, are relatively simple and have become commodified. Logic chips, which run programs and act as the brains of a device, are more complex and expensive. These often carry name brands like Apple, Qualcomm or Nvidia, but those companies are actually just the designers of the semiconductors, which are manufactured in factories called foundries.

4. Why is it so hard to compete?

Manufacturing advanced logic chips is a high-volume enterprise that requires incredible precision, along with huge long-term bets in a field subject to rapid change. Plants cost billions to build and equip, and they have to run flat-out 24/7 to recoup the investment. But it’s not just that. A foundry also gobbles up enormous amounts of water and electricity and is vulnerable to even the tiniest disruptions, whether from dust particles or distant earthquakes.

5. Who are the big manufacturers?

* TSMC pioneered the foundry business — purely manufacturing logic chips for others — with government support in the 1980s and now produces the most sophisticated chips. Everyone beats a path to its door to get the best chips; its share of the global foundry market is larger than its next three competitors combined.

* Samsung dominates in memory chips and is trying to muscle in on TSMC’s goldmine. It has been improving its production technology and winning new orders from companies such as Qualcomm Inc. and Nvidia Corp.

* Intel Corp., the last U.S. champion in the field, has more revenue than any other chipmaker but its business is heavily concentrated in manufacturing its own-brand chips that serve as the central processing unit (CPU) for laptops and desktop computers. Production delays have made it vulnerable to rivals, who are winning share using TSMC to produce their designs. Intel unveiled an ambitious bid in March to regain its manufacturing lead and break into the foundry business by spending $20 billion to build two new factories in Arizona.

* Smaller manufacturers include the U.S.’s GlobalFoundries Inc., China’s Semiconductor Manufacturing International Corp. (SMIC) and Taiwan’s United Microelectronics Corp. But they are at least two to three generations behind TSMC’s technology. Famous names such as Texas Instruments, IBM and Motorola, all U.S. companies, have exited or given up trying to keep up with the most advanced manufacturing.

6. How’s the competition going?

The two giants are spending heavily to cement their dominance: TSMC said in April it would ramp up its capital expenditure over the next three years to $100 billion, including about $30 billion on capacity expansion and upgrades in 2021, from a record $17 billion last year. Samsung is earmarking about $116 billion for a decade-long project to catch its Taiwanese rival. China is pushing hard to catch up as part of its efforts to reduce the country’s reliance on U.S. technology. Moves under U.S. President Donald Trump to hamstring China’s tech giants by restricting access to American intellectual property such as software and gear for designing chips added impetus. But China has a long way to go. For instance, in the automotive sector, China has developed a large number of chip-design companies in recent years but they still aren’t able to come up with the advanced chips that serve as the brains for today’s ever-smarter cars. In March, China again pledged to boost spending and drive research into cutting-edge chips as part of its new five-year economic blueprint. While specifics won’t emerge for months, SMIC has already announced plans for a $2.35 billion plant with funding from the city of Shenzhen. The facility aims to begin production by 2022 and eventually churn out 40,000 12-inch wafers a month, or about half a million a year. (Wafers are used to fabricate chips.) By comparison, TSMC shipped about 12.4 million such wafers in 2020.

7. What about outside Asia?

The U.S., which still leads the world in chip design, is seeking to encourage companies to build or expand advanced factories domestically to address what Commerce Secretary Gina Raimondo called a supply chain “crisis” and a risk to national and economic security. At a White House meeting in April, President Joe Biden told company executives that he had bipartisan backing for his proposal to spend $50 billion to support semiconductor manufacturing and research. His administration will play a role in formulating tax incentives for a proposed $12 billion TSMC plant in Arizona and a $17 billion facility Samsung is considering, possibly in Texas. Similarly, the European Union is exploring ways to build an advanced semiconductor factory in Europe, possibly with assistance from TSMC and Samsung, as part of its goal to double chip production to 20% of the global market by 2030. In April the U.K. intervened in California-based Nvidia’s $40 billion deal for British semiconductor designer Arm Ltd. on national security grounds.

8. Where’s the technology headed?

As 5G mobile networks proliferate — driving demand for data-heavy video and game streaming — and more people work from home, the need for more powerful, energy-efficient chips is only going to grow. TSMC and Samsung are thus working to make transistors increasingly microscopic so more can fit into a single chip. Even small improvements can deliver substantial cost savings when multiplied across the full scale of something like Amazon Web Services Inc., a cloud-computing provider. The rise of artificial intelligence is another force pushing innovation, since AI relies on massive data processing. More efficient designs also will help develop the so-called internet of things — a universe of smart or connected devices from phones to light switches and refrigerators.

9. How does Taiwan fit into all this?

The island democracy emerged as the dominant player in part because of a government decision in the 1970s to promote the electronics industry, aided by a technology transfer deal with RCA Corp., the former U.S. electronics giant, and the trend in the West toward outsourcing. Matching its scale and skills now would take years and cost a fortune: The Boston Consulting Group and Semiconductor Industry Association estimated more than $1 trillion over 10 years for the U.S. to achieve “complete manufacturing self-sufficiency” in chips. Chinese President Xi Jinping has pledged to invest $1.4 trillion through 2025 in key technologies including semiconductors. Political tensions could disrupt the race, however. The Biden administration has signaled it will continue Trump’s efforts to restrict China’s access to cutting-edge American technology — including that used in Taiwan’s foundries. More ominously, the U.S. could face difficulties if it found itself cut off. China has long claimed Taiwan as a renegade province and threatened to invade to prevent its independence.

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