Enterprise

When forecasts go wrong: What caused the chip shortage that threatens holiday shopping

The chip shortage has made consumer products of all kinds hard to buy this holiday season. Here's why.

Chips

By the time you read this, it's probably too late.

Photo: Chris Ratcliffe/Bloomberg via Getty Images

Click banner image for more Shopping Week coverage

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.

Fintech

Judge Zia Faruqui is trying to teach you crypto, one ‘SNL’ reference at a time

His decisions on major cryptocurrency cases have quoted "The Big Lebowski," "SNL," and "Dr. Strangelove." That’s because he wants you — yes, you — to read them.

The ways Zia Faruqui (right) has weighed on cases that have come before him can give lawyers clues as to what legal frameworks will pass muster.

Photo: Carolyn Van Houten/The Washington Post via Getty Images

“Cryptocurrency and related software analytics tools are ‘The wave of the future, Dude. One hundred percent electronic.’”

That’s not a quote from "The Big Lebowski" — at least, not directly. It’s a quote from a Washington, D.C., district court memorandum opinion on the role cryptocurrency analytics tools can play in government investigations. The author is Magistrate Judge Zia Faruqui.

Keep Reading Show less
Veronica Irwin

Veronica Irwin (@vronirwin) is a San Francisco-based reporter at Protocol covering fintech. Previously she was at the San Francisco Examiner, covering tech from a hyper-local angle. Before that, her byline was featured in SF Weekly, The Nation, Techworker, Ms. Magazine and The Frisc.

The financial technology transformation is driving competition, creating consumer choice, and shaping the future of finance. Hear from seven fintech leaders who are reshaping the future of finance, and join the inaugural Financial Technology Association Fintech Summit to learn more.

Keep Reading Show less
FTA
The Financial Technology Association (FTA) represents industry leaders shaping the future of finance. We champion the power of technology-centered financial services and advocate for the modernization of financial regulation to support inclusion and responsible innovation.
Enterprise

AWS CEO: The cloud isn’t just about technology

As AWS preps for its annual re:Invent conference, Adam Selipsky talks product strategy, support for hybrid environments, and the value of the cloud in uncertain economic times.

Photo: Noah Berger/Getty Images for Amazon Web Services

AWS is gearing up for re:Invent, its annual cloud computing conference where announcements this year are expected to focus on its end-to-end data strategy and delivering new industry-specific services.

It will be the second re:Invent with CEO Adam Selipsky as leader of the industry’s largest cloud provider after his return last year to AWS from data visualization company Tableau Software.

Keep Reading Show less
Donna Goodison

Donna Goodison (@dgoodison) is Protocol's senior reporter focusing on enterprise infrastructure technology, from the 'Big 3' cloud computing providers to data centers. She previously covered the public cloud at CRN after 15 years as a business reporter for the Boston Herald. Based in Massachusetts, she also has worked as a Boston Globe freelancer, business reporter at the Boston Business Journal and real estate reporter at Banker & Tradesman after toiling at weekly newspapers.

Image: Protocol

We launched Protocol in February 2020 to cover the evolving power center of tech. It is with deep sadness that just under three years later, we are winding down the publication.

As of today, we will not publish any more stories. All of our newsletters, apart from our flagship, Source Code, will no longer be sent. Source Code will be published and sent for the next few weeks, but it will also close down in December.

Keep Reading Show less
Bennett Richardson

Bennett Richardson ( @bennettrich) is the president of Protocol. Prior to joining Protocol in 2019, Bennett was executive director of global strategic partnerships at POLITICO, where he led strategic growth efforts including POLITICO's European expansion in Brussels and POLITICO's creative agency POLITICO Focus during his six years with the company. Prior to POLITICO, Bennett was co-founder and CMO of Hinge, the mobile dating company recently acquired by Match Group. Bennett began his career in digital and social brand marketing working with major brands across tech, energy, and health care at leading marketing and communications agencies including Edelman and GMMB. Bennett is originally from Portland, Maine, and received his bachelor's degree from Colgate University.

Enterprise

Why large enterprises struggle to find suitable platforms for MLops

As companies expand their use of AI beyond running just a few machine learning models, and as larger enterprises go from deploying hundreds of models to thousands and even millions of models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

As companies expand their use of AI beyond running just a few machine learning models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

Photo: artpartner-images via Getty Images

On any given day, Lily AI runs hundreds of machine learning models using computer vision and natural language processing that are customized for its retail and ecommerce clients to make website product recommendations, forecast demand, and plan merchandising. But this spring when the company was in the market for a machine learning operations platform to manage its expanding model roster, it wasn’t easy to find a suitable off-the-shelf system that could handle such a large number of models in deployment while also meeting other criteria.

Some MLops platforms are not well-suited for maintaining even more than 10 machine learning models when it comes to keeping track of data, navigating their user interfaces, or reporting capabilities, Matthew Nokleby, machine learning manager for Lily AI’s product intelligence team, told Protocol earlier this year. “The duct tape starts to show,” he said.

Keep Reading Show less
Kate Kaye

Kate Kaye is an award-winning multimedia reporter digging deep and telling print, digital and audio stories. She covers AI and data for Protocol. Her reporting on AI and tech ethics issues has been published in OneZero, Fast Company, MIT Technology Review, CityLab, Ad Age and Digiday and heard on NPR. Kate is the creator of RedTailMedia.org and is the author of "Campaign '08: A Turning Point for Digital Media," a book about how the 2008 presidential campaigns used digital media and data.

Latest Stories
Bulletins