Corona Daily 104: When the Chips are Down and…

One of the biggest pandemic shortages, a supply shock, is that of the sixty year old invention – the chip, the semiconductor.

General Motors, Volkswagen and Ford have halted car production. Ford said it will produce 1.1 million fewer cars in 2021. This week Apple, Samsung and Caterpillar issued warnings that the chip shortage crisis is likely to go beyond the next year. Playstations and Xboxes are hard to find. Lead times for Broadcom Inc., which offers Wi-Fi 6E, has gone up to 22.2 weeks from 12.2 weeks in February 2020.

An analysis by Goldman Sachs shows the chip shortage touches a mindboggling 169 industries, including steel and ready mix-concrete manufacturing, air-conditioning, refrigerators, soap making and breweries. In the automotive sector, 4.7% of industry GDP is spent on microchips. What is not so widely known is that many electronic dog washing booths (like car washing automats) that use shampoo, water and fur-drying are shut for want of chips.

On 12 April, President Biden called an emergency chip summit, attended by senators from both parties, chip developers and makers.

Every smartphone, every telemedicine, every remote worker, all online education, every autonomous vehicle, every aspect of humanity is becoming more digital. The moment it becomes digital, it needs semiconductors.

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When the coronavirus pandemic started a year ago, it was a shock for all professional forecasters. In the heaviest lockdowns, car manufacturers predicted dramatic declines in sales. The chip manufacturers in Taiwan and South Korea reduced their production forecasts. While this was happening, suddenly the sales of smartphones and PCs shot up. By 13% as we now know. People were using more broadband, more online meetings, buying more advanced smartphones. The chips required for smart devices are modern, complex and more profitable. The manufacturers are more interested in making chips for i-phones than a Ford car.

At the end of 2020, demand for cars picked up. Probably because many people were worried about using public transport. By the time car-makers went back to the chip producers, the capacity had been diverted to smartphones. Smartphones outnumber cars by a large margin. In 2019, before the pandemic disrupted the supply dynamics, the world produced 93 million vehicles and 1.4 billion smartphones. It’s a no-brainer which customers chip-makers prefer.

Chips that may cost a dollar or so can now hold up the production of a car priced at $100,000.

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The 1985 James Bond movie “A View to a Kill” begins with Bond going to Siberia to recover a Soviet microchip. The Bond villain in that movie plans to detonate explosives beneath the Californian lakes to cause floods that will submerge Silicon Valley forever. The prescient chip-centric plot also includes blowing up of an atomic weapon in space to disable chips in everything. If succeeded, the plot would stop everything from the modern toaster to the most sophisticated computer (as understood in 1985). Of course, Bond foils the plot and saves the world.

The importance of chips was known to villains even in 1985.

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The most complex and expensive chips are logic chips from Qualcomm, Nvidia or Apple. These companies don’t operate fabrication plants (fabs) or foundries to make the chips. Intel (inside) and AMD, two of the best known names in the semiconductor industries, are also the developers, not necessarily the makers. Taiwan makes chips for all these companies.

Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung Electronics are the duopolists. Situated in Asia, they make nearly 80% of all the chips in the world. This makes the Americans very uncomfortable. That is why Joe Biden talked about supporting the “CHIPS for America program”. Intel now wants to start manufacturing chips in Arizona.

The world is going to become smarter and smarter. Electric cars are far more reliant on chips. The chip shortage and the geographic imbalance may result in something far more serious. Why? I will explain it tomorrow.

Ravi