The explosion of demand that cannot be filled in the most monstrously overstimulated economy and markets ever.
By Wolf Richter for WOLF STREET.
The “semiconductor shortage” is a composite of blistering demand from all sides that got further tripped up by the shutdown of four semiconductor plants.
On the demand side: Since last year, there has been red-hot demand for specialized chips that go into crypto-mining rigs as crypto prices started skyrocketing in March 2020. There was the shift to working-from-home and learning-from-home, triggering from one day to the next an explosion of global demand for laptops, particularly low-end laptops, networking equipment, and other electronic devices, such as printers. There was the broad boom in consumer electronics, particularly smartphones and game consoles on which consumers, stuffed with fiscal and monetary stimulus, spent loads of money. There was the boom in cloud computing and the hardware that it is based on.
Then there was the trend to include ever more chips in consumer products, particularly new vehicles where nearly everything from door locks and rear-view mirrors to engine management systems are controlled by semiconductors. Dashboards have turned into outright computers with screens. The driving assist features that modern cars come with require large amounts of computing power.
This sudden explosion of demand is largely a result of pandemic shifts and the most monstrously overstimulated economy and markets ever.
Shutdowns of semiconductor plants vastly complicated this demand situation. As a result of the Big Freeze in Texas in mid-February, three semiconductor plants in Austin shut down. NXP Semiconductor, one of the major manufacturers of chips used by automakers, shut down two plants there for nearly one month. Samsung’s plant was damaged and didn’t reopen until the end of March.
Amid all this, there was a fire at Renesas Electronics chip plant in Naka, Japan, on March 19. The plant specialized in automotive microcontrollers. On June 25, over three months after the fire, the company announced that production at the plant had fully recovered.
These production shortfalls due to the Big Freeze and the fire – particularly of chips used in the automotive sector – during a period when chip fabs were already way behind, threw the entire sector in deep turmoil. And now there is the backlog to deal with.
It isn’t that chip makers stopped making chips, or slowed down production. On the contrary. Global semiconductor sales, on a three-month moving average basis, jumped by 29% year-over-year to a record $44.5 billion in June, according to the according to the Semiconductor Industry Association.
But wait… this record was up only 6% from the prior record set in October 2018, of $42.1 billion, before the crypto-mining boom collapsed. What has been holding back semiconductor sales this year is the limited capacity to make them even as production is getting ramped up:
Global semiconductor sales collapsed by 32%, starting in October 2018 through April 2019 because cryptocurrencies had collapsed starting in late 2017, with Bitcoin crashing 85%, from $20,000 in December 2017 to $3,200 by December 2018, which caused demand for crypto mining rigs to collapse, which caused demand for their specialized chips to collapse.
But cryptos started skyrocketing in March 2020 through May this year, with Bitcoin going from about $5,000 to $65,000 in 14 months (today it’s at $47,000). This caused the crypto-mining business to soar, and along with it demand for chips.
And then on top of the crypto-boom came the boom in demand for laptops, smartphones, game consoles, home networking equipment, other consumer electronics, servers, other consumer products, such as appliances and exercise equipment that are stuffed with chips….
The historic and sudden spike in retail sales of durable goods entail a similar spike in demand for chips, and chip manufacturers, though now cranking out chips are record levels fell way behind demand, and couldn’t fill the orders for some chips.
The automotive component makers and assembly plants have been hit particularly hard because of the shortage of the semiconductors that go into microcontroller units (MCUs) that combine CPUs, flash memory, and other devices, and are used in large numbers in each vehicle today to control tire pressure gauges, rain sensors and windshield wipers, braking systems, acceleration, steering, ignition, combustion, rear-view mirrors, door locks, etc.
If only one MCU is missing for the vehicle – such as the MCU that goes into the rear-view mirror – the whole assembly plant comes to a halt. To keep the plant operating, the automaker can build the vehicle minus the rear-view mirror. There are now hundreds of thousands of unfinished vehicles parked somewhere around assembly plants, waiting for missing components. When the component gets it, the automaker can then install the component, finish the vehicle, and ship it to the dealer.
But if the missing chip goes into a system that cannot be easily added to the vehicle afterwards, the entire assembly line stops and waits for the chips. This is widespread, with dozens of plants shut down for weeks at a time around the globe.
Consumers and companies with some flexibility can still get a computer or a server or a smartphone. But perhaps not exactly what they had wanted. And they might have to pay more. For example, last week, I got a new server to run WOLFSTREET.com on, with a 16-core CPU and solid-state disk drives, no problem. I took what was available and wasn’t looking for anything in particular, as long as it did the job.
But automakers don’t have that flexibility. They’re building big, costly, and complex machines with very specific requirements that were set many months or years ago.
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