Global Chip Shortage
The world is suffering from a systemic shortage of chips. Semiconductors power just about everything now. A car is a small data centre on wheels. When Zoom calls are done, cloud data centres full of chips are chugging away to make that happen. The world’s appetite for chips is higher than ever, and that demand is growing rapidly.
Semiconductor markets have not been paid much attention for many years. However, people learned that GPUs were useful for processing AI workloads that were in high demand. Around the same time, mobile phones became much more powerful, catapulting the ARM architecture. Meanwhile, the internet of things became a reality, fueled by a rapid improvement in price-performance ratios on the chips. These dynamics generated a flurry of activity in the chip industry.
A shortage of semiconductors is currently halting production operations in key industries, one example being the automotive industry. Compounded by a rapid increase in demand, some automotive manufacturers are having to navigate very difficult waters due to the global shortage. Some industry experts are projecting that this shortage could last well into 2022, adding pressure on automotive manufacturers for whom semiconductors are essential.
Why is there a Global Chip Shortage?
There are two key factors driving the shortage:
- COVID-19-driven disruption to supply and demand dynamics
The problem is a classic supply and demand imbalance: We have surging demand and limited supply. Demand for cloud computing services from providers like AWS, Microsoft Azure continues to skyrocket leading them to purchase a lot of semiconductors. Mobile phone makers like Apple, Samsung, and Huawei buy lots of chips. Likewise, PCs also require a lot of chips. Piled atop all that, is a shortage of GPUs and other chips gobbled up by cryptocurrency gluttons. The pandemic played a role in this demand surge, too. With the work-from-home surge, came the surge in PC sales. Zoom, Teams, and other collaboration platforms became the meeting room, thereby exploding the demand for these services. Since they are all running in the cloud, these cloud services need more chips.
At the same time, demand for automotive chips declined as orders for new cars fell in 2020. Semiconductor foundries shifted capacity to consumer products, which tend to be more sophisticated and offered better margins. This has led to a shortage of capacity for industrial chip production. When auto sector demand rebounded in the second half of 2020, car companies couldn’t get enough.
- Geopolitical tensions between the U.S. and China
The geopolitical tensions have affected the appetite of global tech companies to invest. That’s added to the shortage because only a handful of advanced foundries can support the surge in demand for semiconductors.
What does this mean for inflation?
As a result of the global chip shortage, we have observed inflationary pressure in information technology hardware prices, which could be a long-term phenomenon and create a higher barrier to entry for the semiconductor sector given increasing capital intensity. Chinese makers of home appliances have started announcing notable price increases for the first time in decades. This also partly reflects insufficient supply of raw materials, such as substrates, or wafers. The macroeconomic implication is that supply shortages could boost prices and shrink retail sales, and margins, for semiconductor-intensive devices. We expect car companies will face higher chip costs but this cost rise is unlikely to lead to significant global CPI growth since a 10% increase in auto-related chip prices would lead to an increase of around 0.2% in auto production costs.