Carmakers from Tokyo to Detroit are slashing production. PlayStations are getting harder to find in stores. Even aluminum producers warn of a potential downturn ahead. All have one thing in common: an abrupt and cascading global shortage of semiconductors.
Semiconductors, also known as integrated circuits or more commonly just chips, may be the tiniest yet most exacting product ever manufactured on a global scale. That level of cost and difficulty has fostered a growing worldwide dependence on two Asian powerhouses — Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. — a reliance exacerbated by the pandemic and rising U.S.-China tensions even before the current deficit. Hundreds of billions will be spent by governments and corporations in a plethora of sectors in coming years on a “chip race” with geopolitical as well as economic implications.
1. Why are there shortages of chips?
A lot, but not all, of the disruption can be tied to the pandemic. Here are some factors:
* The stay-at-home era caused by the coronavirus pushed demand beyond levels projected by chipmakers. Lockdowns spurred growth in sales of laptops to their highest in a decade, along with home networking gear and monitors, as office work moved out of the office, and of Chromebooks as school left school. Sales also jumped for home appliances from TVs to air purifiers, all of which now come with customized chips. Even webcams like the Razer Kiyo grew hard to find after video services boomed for work and entertainment.
* Uncertainties caused by the pandemic led to sharp swings in orders. TSMC executives said on its two most recent earnings calls that customers have been accumulating more inventory than normal to hedge against uncertainties. Automakers that cut back drastically in the early days of the outbreak underestimated how quickly sales would rebound. They rushed late last year to re-up orders, only to get turned away because chipmakers are stretched to the max supplying smartphone giants like Apple Inc.
* Stockpiling: PC makers began warning about tight supply of semiconductors early in 2020. Then by mid-year, Huawei Technologies Co. — a major smartphone and networking gear maker — began hoarding components to ensure its survival from U.S. sanctions that threatened to cut it off from its primary suppliers of chips. Other Chinese companies followed suit, and the country’s imports of chips climbed to almost $380 billion in 2020 — making up almost a fifth of the country’s overall imports for the year.
2. What’s the upshot?
Some businesses are getting whacked. Chip shortages are expected to wipe out $61 billion of sales for automakers alone and delay the production of a million vehicles in the March quarter, but the fallout now threatens to hit the much larger electronics industry. Not only cars but possibly a broad spectrum of chip-heavy products from phones to gaming consoles could see shortages or price hikes. NXP Semiconductors NV and Infineon Technologies AG both indicated that supply constraints have spilled beyond Automotives.
3. Who are the big players?
Advanced logic chips grab the headlines as the most expensive and complex pieces of silicon that give computers and smartphones their intelligence. When you hear about Apple or Qualcomm or Nvidia chips, those companies are actually just the designers of the semiconductors, which are made in factories called foundries.
* TSMC leads the industry in production capabilities and everyone now beats a path to its doorstep to get the best chips made in its Taiwan facilities. The company’s share of the global foundry market is larger than its next three competitors combined.
* Samsung, overall a bigger chipmaker because of its dominance in memory chips, is trying to muscle in on that goldmine and is improving its production technology to be widely rated as the best option behind TSMC. Companies such as Qualcomm Inc. and Nvidia Corp. have increasingly turned to Samsung.
* Intel Corp., the last U.S. champion in the field, still has more revenue than any other chipmaker but its market is heavily concentrated in computer processors and production delays have made it vulnerable to rival designers that’re taking share using TSMC.
* TSMC and Samsung do face smaller competitors including Global foundries, China’s Semiconductor Manufacturing International Corp. and Taiwan’s United Microelectronics Corp. But those rivals are at least two to three generations behind TSMC’s technology.
4. What’s happening in this race?
The two Asian giants are spending heavily to cement their dominance: TSMC raised its envisioned capital expenditure for 2021 to as much as $28 billion from a record $17 billion a year prior, while Samsung is earmarking about $116 billion on a decade-long project to catch its Taiwanese arch-rival. But China is pushing hard to catch up. It’s aimed for years to reduce its reliance on US. technology, particularly in chips. The Trump administration’s efforts to curb China’s technology giants — by barring Huawei’s access to chips and and discouraging American investment in scores of players like SMIC and Xiaomi Corp. — crystallized those fears. Beijing has enshrined chipmaking among its biggest priorities in its national economic blueprints, and has pledged to spend more than $140 billion on building a world-class domestic semiconductor sector. But it 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’re still not able to make the advanced chips needed for today’s cars.
5. How about elsewhere?
Given the difficulty in developing sophisticated chipmaking capabilities, governments from Brussels to Washington are dangling incentives to anyone who will build or expand advanced facilities in their backyards. The White House is expected to sign an executive order directing a government-wide supply chain review for critical goods in the coming weeks, with the chip shortage a central concern behind the probe. The Biden administration, which is putting together a longer-term plan for chip supply, will play a key role in formulating tax incentives for a proposed $12 billion TSMC plant in Arizona and another costlier one Samsung is eyeing, possibly in Texas. And the European Union is considering building an advanced semiconductor factory in Europe with potential assistance from TSMC and Samsung. Governments including China are now considering various ways to prop up local companies.
6. Why is it so hard to compete on chips?
Chipmaking is a high-volume business that calls for incredible precision, along with making huge long-term bets in a field subject to rapid change. Famous companies such as Texas Instruments Inc., International Business Machines Corp. and Motorola have exited or given up trying to keep up with the most advanced chip manufacturing. Today most companies focus on design. With only three companies — TSMC, Samsung and Intel — still making advanced logic chips, and the American company struggling to keep up, a crucial skillset has become concentrated in the hands of just a few. Chips are made in plants that cost billions to build and equip. They have to run flat-out 24/7 to recoup their investment. But it’s not just that. Yield, or the amount of good chips per batch, determines success or failure. It takes years of knowhow and experience to get a yield of 90% out of the complex photolithographic process used to make chips. Imagine Ford being happy to throw away one car in ten. But chipmakers, who make millions of chips in a process that takes three to four months to complete, are successful if they’re hitting that mark. A foundry gobbles up enormous amounts of water and electricity and is vulnerable to even the tiniest disruptions (whether from dust particles or distant earthquakes). In 2019, TSMC shipped about 10 million advanced 12-inch wafers.
7. Who benefits from the chip wars?
Even small improvements in semiconductors can deliver substantial savings in energy and cost when multiplied across the full scale of something like Amazon Web Services. As 5G mobile networks proliferate and push up demand for data-heavy video and game streaming and more people work from home, the need for newer, more power-efficient silicon is only going to grow. One way to measure the sophistication of a chip is so-called line-widths, or the distance between circuits. The current standard in advanced chips is 5 nanometers or billionths of a meter, about a hundred-thousandth of the width of a strand of hair, although TSMC and Samsung are working on 3nm mass production by 2022. Along with 5G, the rise of artificial intelligence is another force pushing chipmakers to innovate: AI relies on massive data processing. More efficient or power-saving designs is also becoming a critical consideration given the so-called Internet of Things — a universe of smart or connected devices from the beefiest phones to the most common fridges and washing machines — is expected to swell usage of chips exponentially in coming years.
8. How does Taiwan fit into all this?
The island democracy has emerged as an industry linchpin thanks to TSMC and an entire ecosystem geared toward high-end electronics. U.S., European and Japanese automakers are lobbying their governments for help navigating the chip crunch, with Taiwan and TSMC being asked to step in. Those pleas illustrate how TSMC’s chip-making skills have handed Taiwan political and economic leverage in a world where technology is being enlisted in the great power rivalry between the U.S. and China — a standoff unlikely to ease under the Biden administration.
The Reference Shelf
- A deep dive on how the world got so dependent on Taiwan for its chips.
- More Quick Takes on the internet of things, why building an electric car is so expensive, and Taiwan’s tightrope.
- Bloomberg Opinion’s Anjani Trivedi on Toyota’s chip surplus, Alex Webb warns about a European white elephant chip plant, and Tim Culpan on Samsung’s weak spots.
- The Economist sees the geopolitical struggle over chipmaking entering a new phase.
- Biden’s team is pledging a 100-day review focused on choke points in supply chains.
Bloomberg: Debby Wu; Sohee Kim; and Ian King