In its quarterly report this week, Apple cautioned that although it had a terrific quarter, it may not be able to keep up with growing demand for its products given the worldwide shortage of computer chips. Apple is certainly not alone here – others have called out concerns about the shortage, including Intel, Nvidia, AMD, and Samsung. And it’s not just mobile and consumer devices that could be hit by this shortage – cloud and enterprise data centers could be impacted too, and automakers have already had to reduce production due to chip shortages. The skyrocketing demand of new equipment to enable 5G networks worldwide is also placing pressure on this market. In this “smart” and highly connected world, there is little produced that doesn’t need some embedded computer brains.
Is the shortage real?
Some have wondered if this shortage is overblown. My opinion is that the chip shortage is real, but it’s not affecting everyone the same way. The biggest purchasers of chips (e.g., Qualcomm, Nvidia, AMD, Apple, Samsung, etc.) have placed high volume standing orders from the contract fabs primarily in the Far East (the largest being TSMC, but also producers like Global Foundries, Samsung, etc.) and as a result get priority due to the size and long duration production of their purchases (long-duration, high-volume products are where the fabs make their profits). They order products over a long time period and maintain inventory on hand; they don’t just place spot orders when needed as some companies are prone to do (e.g., the automakers who don’t “order to inventory” but instead order for just-in-time manufacturing). Meanwhile, “lower priority” customers who can fill in chip line production gaps in normal times have to wait in an increasingly long queue when they do place new or additional orders, so they don’t get the product they need in what they consider a timely fashion. Even Intel, which makes most of its own chips in house and can therefore more or less control its own manufacturing destiny, has seen an inability to ramp up production fast enough to meet increased market demands, especially in the red-hot PC space. Of course, Intel also buys a substantial number of chips from TSMC and Samsung for several of its product offerings, so it is affected by the outsourced fabs’ capacity constraints as well.
There’s no room to increase manufacturing volumes
The major problem Apple and similar very high volume mobile players (such as Samsung) are facing is that the fabs are already running at maximum capacity. If demand suddenly goes up, as it has in the pandemic for not only consumer products but also for servers in cloud and enterprise installations, it’s very difficult for the contract fabs to increase output. And there’s no quick fix. Building a new fab can take 2-3 years and can cost $10 billion-$20 billion, so even with all the announcements lately of companies committing to new fabs (e.g., Intel, Samsung, TSMC) and even with government incentives from the US and other countries, you can’t simply turn on a new manufacturing line in short order. The issue is further compounded by the fact that much of the increased demand is in new-generation chips that can’t readily be run on older production lines that may have capacity to spare; and those lines would be too costly and take too long to retrofit. There is talk of expanding production sites to other areas of the world (e.g., India, mainland China), but starting up totally new production from scratch, and with companies that are new to the game, is a slow process.
How long will this be an issue?
So will all of this have a long-term effect on companies like Apple and Samsung, and potentially Google, AWS, Microsoft, and other cloud providers, as well as cutting edge companies like Nvidia? It will likely take at least 18-24 months to stabilize the supply chain, unless there is a sudden case of markets shrinking due to some catastrophe or economic collapse (that’s unlikely but possible). Until this gets resolved, we can expect to see many companies negatively affected (some more, some less) by the chip shortage, even while all the chip makers race to add capacity. But it’s not all gloom for semiconductor-related companies; it’s a great time to be a chip manufacturing equipment supplier!
What’s an enterprise to do?
The effect on enterprise customers will be varied. In the short term, you can expect to see shortages of some products like PCs, and even Chromebooks, as well as some high end mobile devices. They’ll be available, but perhaps not in the numbers or at the discounted prices many enterprises are used to. In data center servers, organizations can expect to see increased delivery times, so getting orders in ahead of the curve of when you’ll actually need them would be a wise move. Public clouds (e.g., AWS, Google Cloud Platform, Microsoft Azure) should not be dramatically affected as they have a good deal of capacity and can usually get new supplies of computers in a priority fashion, but some of the custom chip solutions they are deploying (e.g., AWS Graviton) may be impacted. Finally, enterprises should be aware that “business as normal” in procuring computing systems may not return to normal for several quarters at least. Plan accordingly.
Jack Gold is the founder and principal analyst at J.Gold Associates, LLC., an information technology analyst firm based in Northborough, MA., covering the many aspects of business and consumer computing and emerging technologies. Follow him on Twitter @jckgld or LinkedIn at https://www.linkedin.com/in/jckgld.
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