By the time you read this, if your holiday shopping includes just about anything that needs a computing chip, it might be better to wait until next year to buy it.
Thanks to a global run on the silicon chips that power just about every consumer product ranging from refrigerators to next generation video game systems, this holiday shopping season is probably going to be one of the most unusual many of us will experience. The expert advice? Get it early, expect to overpay and don't hesitate.
"You better start shopping sooner rather than later, and once you see it, regardless of that price in retail, you need to buy it or you risk not getting it," CEO and principal analyst at Creative Strategies Ben Bajarin told Protocol.
It's possible there will be some relief for consumers next year. According to Whitman School of Management professor of supply chain practice Patrick Penfield, shortages may lead to over-ordering, which might force retailers to sell excess seasonal inventory at a discount.
"What happens is the whole supply chain gets filled with all these materials," he said. "Eventually it all comes to roost when, which is eventually going to happen in the first and second quarter. It'll get into stores and they're going to have to mark down a lot of that seasonal stuff."
But it's hard to know exactly how the shopping season will play out over the next few weeks, and some patience — never easy to come by on Black Friday — will likely be required.
Getting to this point has not been a straightforward or obvious path, even with the benefit of hindsight. It took the well-known complexities involved with chipmaking coupled with a generational shift in computing, both of which were further aggravated by the economic changes wrought by the COVID-19 pandemic.
"It's a multidimensional problem," Maribel Lopez, founder of Lopez Research, told Protocol. "One problem is the chip shortage. Another is the [shipping] container shortage."
None of this has been lost on corporate America, which has mentioned the chip shortage 3,247 times in corporate earnings calls, presentations and filings so far this year, compared with seven times in 2020 and almost never in years prior, according to data from corporate research platform Sentieo.
The chip crunch
Semiconductor manufacturing is an incredibly complex and expensive business, and it can take years to adjust to big changes in demand. Executives make production decisions months in advance, especially to secure the most advanced manufacturing capabilities needed to make chips that power iPhones and supercomputers.
Expanding that manufacturing capacity requires tens of billions of dollars, thousands of skilled workers and months or years to construct the facilities. And there are only two companies that can make the most advanced chips for third parties right now: TSMC and Samsung Electronics.
Because of the enormous cost of building new plants, companies are loath to build manufacturing capacity that executives think will ever sit idle.
"Chip manufacturers use what's called a lag-type capacity strategy, so they will wait to see if the demand is there and then they'll go ahead and build the capacity," Penfield said.
The market conditions ahead of the COVID-19 pandemic weren't particularly favorable for the chip industry, either. Toward the end of 2019, some companies forecast that demand for chips was going to drop slightly in 2020, according to Intel's Greg Bryant, vice president of the client computing group. The coronavirus threw those plans into the blender.
"When the pandemic hit, it just threw everything out the window as far as their forecasting capabilities because they didn't see this coming," Penfield said.
The shortage issues caused by the soft forecast for 2020 worsened as the coronavirus spread around the world. Government-ordered lockdowns designed to slow the virus' spread hurt manufacturing and triggered a big shift in how people spent their money. Instead of going to restaurants or to the movies — because they couldn't — people decided to buy lots of other physical goods they could use while stuck at home.
Companies that had tried to forecast how many chips they needed to manufacture with a fixed amount of old equipment began to have problems as people bought more goods, Bryant told Protocol. "Demand massively accelerates as consumer spending shifts from services to goods, and it takes time, obviously, to adjust and put more capacity in place."
A lot of those goods turned out to be gadgets: laptops, desktops, video game systems and other electronics that people normally think of as having computer chips. Laptop and desktop sales were powerful through the first year, though they have slowed in recent months.
But even many of the latest run-of-the-mill home appliances use chips that are made at fabrication sites designed around older process technology. Older chips aren't as powerful as the CPUs or GPUs in expensive video game consoles and personal computers, but are great for things such as controlling automatic windows on cars or inside noise-canceling headphones.
"So you have this combination of things that are becoming more and more intelligent — more things look like computers that have chips in them — and the demand has dramatically increased," Bryant said. "A lot of that demand happens to [require] older technology."
Back to the microcontroller
To Bryant's point, one of those technologies is a 60-year-old chip called a microcontroller. Microcontrollers are simple computers in a single package used in autos to control things such as automatic windows, but they can also be found in thousands of other products such as power tools, embedded medical devices and fire detectors.
According to Bajarin, the current lead time for microcontrollers is roughly 25 weeks. Typically one of the most advanced processors in a new Apple computer needs about 12 weeks to manufacture.
Bryant described the groups of components needed to finish a part or a product as a "match set," and his teams are focused on trying to ensure clients have complete sets. Without every chip needed to complete the manufacturing process, products such as autos and video game consoles sit unfinished until the right combination of those chips are available to a manufacturer.
"It's not just one component. You have to have all the components from all the suppliers in the right place, at the right time, in the right system to create the product and get it into the market for people to buy," he said.
The bullwhip effect
The big strain on chip demand is having unintended consequences, potentially worsening the shortage. Manufacturers unable to get sufficient supply have started to hoard the chips they can find.
"But one of the things that's making it worse right now is manufacturers are trying to stockpile additional chips, because you can't assemble a product unless you have everything, right?" Harvard Business School professor of management Willy Shih said.
The stockpiling behavior will likely have unintended consequences at some point in the future too. Penfield said that companies worried they won't have enough chips tend to try to order more, which then leads to even more ordering — for chips, certainly, but also for goods more generally.
It's not that shelves will be entirely bare this holiday season — they won't, at least at first. Big retail companies have placed orders and ensured there will be some consumer products available early in the increasingly lengthy shopping season. According to Lopez, big-box stores predicted what they thought people were going to buy during the holidays roughly nine months ago, or as long as a year ago for some smaller retailers.
But because of the supply-chain issues around the country, the replenishment orders that would normally serve to restock gadgets, toys and other goods people typically buy during the holidays are likely to get stuck in ports.
"That's why people have been told, 'Start shopping early' — because there is just not a lot of stuff on the shelf," Penfield said.