The semiconductor industry is notoriously slow when it comes to reacting to sudden increases in demand. Some analysts believe that demand for chips now exceeds supply by about 30%, and it will take three or four quarters for the supply to catch up with the demand. Essentially, this means that chip shortages will persist well into 2022.
Chip Demand Is Booming
Nowadays, virtually all electronic devices have chips in them, so the demand for semiconductors is generally at an all-time high. Furthermore, these chips are getting more complex (i.e., harder to produce), and the number of chips per device is growing. Last year several additional factors increased the demand for chips to levels way above what the industry can supply.
First, people began to buy more PCs and other electronics (which includes game consoles, televisions, smart home appliances) in 2020 because of the shift to remote working and remote learning, largely because they spend more time at home overall due to the pandemic.
Second, existing manufacturing capacity (the number of chips that can be produced) barely served the demand in 2018 and 2019. It certainly is not enough to meet the demand that overwhelmed the industry in 2020 and 2021.
It is noteworthy that Intel faced tremendous demand for its products in 2018 and took action, but the rest of the industry did not. Consequently, the world now faces a shortage of both semiconductor manufacturing capacity and issues with chip packaging.
Third, the trade war between the U.S. and China made companies buy large quantities of semiconductors in advance (stockpiling), which pressured the supply chain further.
Supply of Chips Is 30% Below Demand
Because of the high demand for chips, stocks of semiconductor companies have soared in recent quarters as all of them are beating the expectations of analysts and their own predictions.
“We believe semi companies are shipping 10% to 30% below current demand levels and it will take at least 3-4 quarters for supply to catch up with demand and then another 1-2 quarters for inventories at customers/distribution channels to be replenished back to normal levels,” said Harlan Sur, an analyst with J.P. Morgan, in a note to clients, reports MarketWatch.
According to Christopher Rolland, an analyst with Susquehanna International Group, lead times for semiconductors today are above 14 weeks (over 3.5 months), which exceeds the cycle time of even the most complex process technologies. Rolland says that the situation would get worse this spring after countries cease lockdowns and economies restart.
“We do not see any major correction on the horizon, given ongoing supply constraints as well as continued optimism about improving demand in 2H21,” wrote Matthew Sheerin, an analyst with Stifel. “We remain more concerned with continued supply disruptions, and increased materials costs, than we do an imminent multi-quarter inventory correction.”
Capacity Build-Up Will Take Time
Major foundries, including Taiwan Semiconductor Manufacturing Co. and GlobalFoundries, have announced expansion plans for this year, and there are indications that packaging companies are going to do the same. However, it will take months for companies like ASML, Applied Materials, KLA, LAM Research, and others to build the fab tools; then, it will take some time to install the equipment. As a result, any capacity-related decision made now will not have an impact until several quarters from now, at best.
Keeping in mind that demand is already outstripping supply by around 30%, and for many products, the backorder is building up, it will take months after semiconductor companies solve their capacity problems before everyone gets the chips they need. Meanwhile, it is unclear what happens to the ‘excess’ capacity after the demand is met and inventory levels get back to normal.
Furthermore, it obviously remains to be seen whether fabless makers of chips continue to introduce new SKUs if they cannot meet demand for existing products.