Protocol | Enterprise

The five stages of coming to terms with a global chip shortage

It turns out those early-pandemic toilet paper hoarders were onto something, even if they missed the mark.

A chip labelled "grief"

CEOs have feelings too.

Illustration: Christopher T. Fong/Protocol

CEOs have feelings too. And it turns out they're under more stress than usual amid the ongoing chip shortage. In the span of a pandemic, just-in-time manufacturing turned into will-it-ever-arrive delivery. Multinational corporations' obsession with efficiency came at the cost of reliability and now everyone is paying the price.

The only thing we know for sure is that nobody seems to know anything for sure anymore. Store shelves nationwide are short on laptops, gaming systems and smartphones. New car production has slowed to a crawl. Shoppers have resorted to bidding up used car prices such that a two-year-old Honda Civic costs more than it did fresh off the production line. It turns out those early-pandemic toilet paper hoarders were onto something, even if they missed the mark.

Protocol decided to check in on some of the biggest names in tech and automotive manufacturing to see how they are responding to the shortage. We've mapped them onto a highly unscientific diagram we're calling The Five Stages of Coming To Terms With The Chip Shortage. Companies source chips in dozens of different ways, of course, and use countless different kinds of chips. But just about everyone's going through the chip shortage … at their own pace.

Stage 1: Is that all you got?

Toyota: Toyota has fared remarkably well in spite of operating at such a large scale. Production decreased by around 40% in August and September but the company expects to recover to normal levels by the end of November. Overall, Toyota only downgraded its fiscal year production forecast from 9.3 million to 9 million. In an online news conference, Toyota CFO Kenta Kon said, "We are also affected by the global semiconductor shortage, but for now, we're not experiencing big cuts to production."

Tesla: Tesla's handling of the chip shortage reiterated the benefits of operating at a smaller scale than the legacy automakers. Musk acknowledged in his Q2 2021 earnings call that "the chip supply is fundamentally the governing factor on our output." However, he went on to detail how Tesla was able to "substitute alternative chips and then write the firmware in a matter of weeks." This approach paid off in Q3 2021, when Tesla was able to report a record profit with shipments up 73% compared to the same period a year prior.

Microsoft: Microsoft's software-driven business isn't all that exposed to the chip shortage, at least relative to its Big Tech rival Apple. The company did so well in its Q3 earnings — bringing in $45.3 billion in revenue, up 22% from the previous year — that it managed to regain the title of world's most valuable company. The limited supply of Xbox Series X and S is one of the most visible signs of Microsoft contending with the chip shortage, but Microsoft said it was able to ship more consoles than expected despite supply falling short of demand. Overall, Microsoft was able to post Xbox hardware revenue growth of 166% year-over-year in Q3. Not bad for a supply chain crisis.

Stage 2: Pain and confusion

Samsung: Samsung falls more in the "confusion" category than the "pain" one. Along with TSMC, Samsung is a top global chipmaker in terms of manufacturing capabilities, and it also has a booming flash memory chip business. The chip shortage has given Samsung more room to demand higher prices for its products: Operating profit for its chip division in Q3 rose an astounding 82% from the prior year. Overall, the chip shortage helped Samsung post a record quarterly revenue and a net profit of $10.5 billion, up 31% year-over-year. On the flip side, however, Samsung's consumer electronics business has suffered due to the shortage. Smartphone shipments, for instance, actually decreased in the latest quarter by a little over 10% compared to the prior year.

Apple: Apple has managed to produce strong results despite the chip shortage, but there are signs of further troubles ahead. In the fiscal Q4 2021 earnings call, Tim Cook said Apple encountered "larger-than-expected supply constraints" for the quarter. Cook added that constraints "driven primarily by industrywide silicon shortages and COVID-related manufacturing disruptions" resulted in a roughly $6 billion revenue impact. Apple essentially had a good quarter that could have been much better. But the worst of the chip supply crunch may still lie ahead: Nikkei Asia reported earlier this week that Apple has had to scale back iPad production by 50% in the past two months to allocate more chips for the iPhone 13. These types of trade-offs are a worrying sign, especially as Apple looks to capitalize on the impressive in-house M1 chips that are now making their way to devices across its lineup.

General Motors: When asked why Tesla was able to increase production despite the chip shortage while GM struggled, GM CEO Mary Barra responded: "I think the complexity of the semiconductors is something that people really don't understand until you dive into it deeply." Barra then went on to reference the difficulties of contending with a Malaysian chip supplier getting hit by a COVID outbreak. GM only shipped 423,000 vehicles in Q3 2021, which was roughly half the shipments from a year prior. Despite the deflection attempts, Barra deserves a healthy serving of blame for GM's current predicament. Under Barra's tenure as CEO, GM has focused on cost-cutting and reworking its supply chains to reduce labor costs. Now it's paying the price.

Stage 3: Sadness

Amazon: The chip shortage touches so many parts of Amazon's business that it's difficult to know where to begin. Though you might expect AWS would be most impacted, that's actually been the bright spot for Amazon: AWS accounted for more than 100% of Amazon's operating income, even though it made up less than 15% of net sales. Amazon's e-commerce business will be impacted by shortages in computer electronics from the chip crunch. But, perhaps of greater importance, it will be contending with overall supply chain issues throughout the holiday season. Andy Jassy said in the Q3 2021 earnings call that Amazon expects to "incur several billion dollars of additional costs in our consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs."

Nintendo: Millions of children are in for a disappointing holiday season if Nintendo's forecasts are correct. In financial documents released earlier this week, Nintendo downgraded its Switch shipment estimate from 25.5 million units to 24 million units for the second half of the fiscal year, which ends March 2022. Nintendo revised the forecast "because of the change in our production plan due to the effects of the global semiconductor shortage." On the bright side, however, it expects software sales to actually improve over the second half of the fiscal year.

Stage 4: Acceptance

Volkswagen: Volkswagen had to cut jobs and scale back production due to the chip shortage. The company CEO Herbert Diess described the situation as "clearly supply not a demand issue." However, Volkswagen seems to also believe that the supply issue isn't going away any time soon. Scott Keogh, the CEO of Volkswagen Group of America, told Reuters that, "without a doubt, this shortage is going to go well into 2022, at least the second half of '22."

Stage 5: Optimism and planning for a brighter future

Intel: For many years, Intel suffered for making the decision to manufacture chips in-house rather than use the specialized production facilities of companies like Samsung and TSMC. Even though Intel has suffered the impacts of the chip shortage, it might ultimately benefit from remaining in the chip production business. In September, Intel broke ground on two of its chip plants in Arizona, three months ahead of schedule. Intel CEO Pat Gelsinger also said in the Q3 earnings call that the company expects to benefit "from investments from governments who understand that a healthy semiconductor industry is vital to their economic well-being and national security."

Sony: Sony has been hard-hit by the chip shortage, most notably in regard to stunted sales of the PlayStation 5. Sony is also one of the top global suppliers of smartphone imaging sensors, so it has been hit by the chip shortage on that front too. However, the company has a plan to emerge from the shortages bigger and better than ever: It wants to partner with TSMC so that it has more control over the production of chip wafers in the future. In Sony's most recent earnings call, its CFO Hiroki Totoki explained the motivation: "Securing a stable supply of logic wafers is a critical business issue at the time when the global semiconductor shortage is expected to be prolonged … Further strengthening and deepening our partnership with TSMC, which has a world-leading semiconductor production technology, is extremely meaningful for Sony."

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