Threat Of Chip Shortages Worry Connected Economy Companies

As tech companies reported record-setting quarterly earnings revenues last week, one very familiar issue continued to loom large across the entire sector: the ongoing global semiconductor shortage – and it shows no signs of abating.

Computer chip supply issues have been well-documented, with sudden shortages notably first crimping the auto industry, which suffered first due to the precarious nature of its supply chains. Automakers have always preferred to keep their stocks low due to the predictable nature of car sales. So when COVID-19 temporarily shut down car-making operations across the world, auto firms responded by ordering fewer chips.

That saw chip fabs reassigning spare production capacity to other industries. Yet, car sales bounced back faster than anyone could have imagined, so automakers ramped up production, causing their stocks of semiconductors to quickly dry up. Finding themselves at the back of the queue as demand for chips elsewhere increased, many automakers saw their factories grind to a halt.

The automotive chip shortage had some unusual repercussions. Car sales in the U.S. hit record highs in April, and low supplies meant new cars were suddenly at a premium. As a consequence, prices for used cars jumped, reaching a high of $18,453 in June 2021, up over a third from the same period one year ago.

Read more: US Auto Sales To Hit Record High For April

Chip producers like TSMC and Samsung bowed to political pressure and moved quickly to bulk up supplies in the automotive industry, but that has come at the sake of other customers – and now there are concerns that supplies will dry up elsewhere. Analysts say there’s a credible chance of more surprising repercussions in dozens of seemingly unrelated industries.

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An April analysis from Goldman Sachs identified a staggering 169 industries that will likely be hampered by the lack of chips. The list includes companies that build air conditioning systems, steel producers, makers of appliances such as refrigerators and washing machines, kitchen cabinet and countertop manufacturers, boat builders, ready-mix concrete companies and breweries. Even soap makers will face difficulties, the report found.

One unlikely victim of the component supply crunch is the restaurant service industry. A Washington Post report in June highlighted how restaurants have recently been hamstrung by a lack of “point of sale” machines that connect servers’ handheld ordering systems to terminals in busy kitchens. These systems have suddenly become much harder to buy, and with many restaurants under-staffed, the shortage is creating some big problems. Related industries such as retail have also been affected by the shortage, per reports.

Another overlooked casualty has been pet care companies. The struggles of a family-run company trading under the name of CCSI International recently hit the headlines in a classic example of the “bullwhip effect” – a distribution channel phenomenon in which demand forecasts yield supply chain inefficiencies. CCSI manufactures pet washing machines that are surprisingly popular, with dog park managers and the U.S. military among its customers. A few months ago, the company’s circuit board supplier said it could no longer obtain enough computer chips.

The disruption meant CCSI couldn’t fulfill its orders, which in turn meant some dog parks were unable to offer self-service dog washing services. The knock-on effect also meant that the soap manufacturers that supply shampoo for the machines lost out, albeit to a lesser degree.

More familiar companies have urged caution, too. Apple, during last week’s earnings call, warned its Mac computer and iPad businesses could take a $3 billion to $4 billion hit in the next quarter. Apple Chief Executive Tim Cook further said there’s a chance the shortage could also impact the much more important iPhone business in the coming quarter. That would cause Apple a whole bunch of problems, as it’s well-known that the company, for all its efforts at diversifying into services such as payments, lives and dies by its iPhone sales.

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Chipmakers admit they cannot address the shortages anytime soon. Intel CEO Pat Gelsinger told analysts during the company’s second-quarter earnings conference call in late July that he expects the chip supply crunch to run through 2023: “It will take another one to two years before the industry is completely able to catch up with demand.”

One of the problems Intel faces is a struggle to get enough raw materials to manufacture its chips. That could lead to “particularly acute shortages” for some products, including PC chips, Intel warned.

GlobalData Analyst Mike Orme told PYMNTS the issue is mainly a shortage of less sophisticated chips at the trailing edge, as opposed to more advanced processors that power the latest iPhones. And he’s worried that semiconductor fabs have little incentive to address the problem.

“Essential support chips such as power management chips are made on wafer-thin profit margins at older manufacturing plants,” Orme explained. “It’s not an area that’s attracting enough investment to extend or enhance capacity to any significant extent. This issue is not attracting much media coverage outside the hardcore tech press.”

So far, most companies have managed to find a way to skirt around the problem, but that won’t last, Orme warned. He noted that stockpiles are slowly dwindling across many industries. Unless chipmakers find a way to beef up production, and do it soon, he predicts that the bullwhip effect will keep springing surprises.