The most often asked question in the tech hardware industry over the last six months is, "When will the chip shortages end?" The table below transcribes recent comments made at investor meetings from electronics and automotive supply chain companies.
Don't read too much into any one comment. There is some mixed messaging between leading-edge nodes (<7nm) vs. older nodes (>20nm). There are also outlook differences between the automotive sector and the rest of the tech hardware industry. Some messages are self-serving, meant to pressure legislators to enact the Chips Act and the $52Bn funding for fab construction.
Compiled Recent Comments from Executives in the Electronic and Automotive Supply Chain
The consensus is that supply will begin to return to "more normal" around the 3rd quarter of this year. That seems reasonable. However, the more relevant question is what happens after the supply and demand balance?
There are dozens of possible scenarios, and it is easy to oversimplify. Each component in each end sector is its own story. For most of the pandemic, semiconductor, passive, and interconnect suppliers grew revenues at double the rate of downstream end equipment and device suppliers. That is unsustainable and is the toilet paper problem that Mr. Musk described in Tesla's quarterly conference call.
"So -- like -- but a lot of these things are alleviating. I think there's some degree of the toilet paper problem as well, where, you know, there was a toilet paper shortage during COVID, and like, obviously, it wasn't really certainly a tremendous enhanced need for ass wiping. It's just people panicked..........
"......So, I think we saw just a lot of companies over-order chips, and they buffer the chips. And so, we should see -- we see the alleviation in almost every area, but the output of the vehicle is -- goes with the least lucky. You know, what is the most problematic item in the entire car is there's like, at least, 10,000 unique parts in the car, so waiting for more than that if you go further off the supply chain, and it's just -- which one is going to be the least lucky one this time? It's hard to say."
--Elon Musk Tesla Q4 Conference Call
The comments are funny, but only because they are probably accurate. Price escalation and hoarding (double and triple ordering) are common during the bullwhip effect's upside.
Bottleneck semiconductors (like power management ICs) will be the limiting factor for production over the next six to nine months. During that time, non-bottleneck parts sit in inventory and wait for the bottleneck components to arrive. The consensus estimate for "normalcy" by Q3 would suggest that some component suppliers will start seeing an inventory correction a bit sooner as overstocked inventories send signals to turn off the taps. Even though part shortages are still part of the industry narrative, the warning signs are everywhere. Display panel pricing has been falling for the last six months due to oversupply. DRAM markets are starting to show signs of oversupply. Murata reported a book-to-bill ratio falling below one for the previous quarter.
What does this mean for 2022 prospects? Most semiconductor forecasts for 2022 are mid to high single digits. The high end of these forecasts assumes a correction that begins later in 2022 and won't significantly impact the full-year revenues. The low-end estimates assume an inventory correction earlier in 2022, impacting Q3 and Q4 revenues.
Much will depend on how fast inventories can dissipate for other component markets. Some component sectors, like MLCCs, are also in short supply. But, aside from these exceptions, the rest of the supply chain is likely to underperform the downstream equipment and device market in 2022.
There is a reason for optimism. The long-term outlook hasn't been this good since the mid-2000s when Apple introduced smartphones. The supply and demand oscillations caused by the Covid shock are happening around an accelerating trendline for electronic content. Pat Gelsinger of Intel described it as "entering a new golden age for semiconductors." Over the next decade, vehicle electrification and automation will drive a part of this growth. Likewise, we have only begun transitioning to 5G, cloud, and edge infrastructure. Moreover, at least another dozen smaller trends will reinforce a growing industry.
Ironically, the headwind for this golden age is the same thing driving the current chip shortages. With the slew of new fabs scheduled to come online in the next two years, the semiconductor industry is going through a typical countercyclical capacity expansion. It is a familiar scenario for industry veterans, even if there hasn't been a full-fledged cycle in a while. Over the past ten years, the slowing of Moore's law, industry consolidation, and lengthening upgrade cycles of smartphones, PCs, and other devices limited the overall cyclicality to memory markets.
But Covid was a step change input to the whole supply chain. As a result, we are experiencing an underdamped response that will go through several ups and downs over the next few years. Get ready for a wild ride.