The world is suffering from a systemic shortage of chips. Worry not, your supply of Cool Ranch Doritos is just fine. The chips I’m talking about here are based on silicon, not potatoes or corn. Semiconductors power just about everything now. Your car is a small data center on wheels. When you do a Zoom call, cloud data centers full of chips are chugging away to make that happen. The world’s appetite for chips is higher than ever, and that demand is growing rapidly.
At Forrester, we hadn’t really paid much attention to the semiconductor market for many years. Frankly, the industry got pretty boring. It revolved a lot around microprocessors, and the mainstay for those products was a ping-pong battle between Intel and AMD. Then things changed … in a big way. People learned that GPUs were useful for processing AI workloads that were in high demand. Around the same time, mobile phones became much more powerful, catapulting the ARM architecture from a quaint toy to become a real threat. Meanwhile, the internet of things became a reality, fueled by a rapid improvement in price-performance ratios on the chips.
These dynamics generated a flurry of M&A activity in the chip industry, and suddenly, this is a very interesting space again! First, NVIDIA announced it will acquire Arm, then AMD said it will buy Xilinx. More recently, Intel brought back one of its former stars to lead as CEO, AMD announced its powerful new family of EPYC processors, Intel launched its new Xeon around the same time, and NVIDIA just announced Grace, its new CPU-GPU combo. The gloves are off, and this battle will be a fun one to watch. You should care — which is why we at Forrester now care.
We now hear a lot in the news about chip shortages that threaten product deliveries from PCs to automobiles to consumer electronics. What is causing these shortages, and when will it improve? I’m going to answer those questions.
Why Is There A Global Chip Shortage?
The problem is a classic supply and demand imbalance: We have surging demand and limited supply. Demand for cloud computing services from providers like AWS, Microsoft Azure, and Alibaba continues to skyrocket. They buy lots of semiconductors. Mobile phone sales remain hot. Makers like Apple, Samsung, and Huawei buy lots of chips. PCs are hot. They buy lots, too! Piled atop all that is a shortage of GPUs and other chips gobbled up by cryptocurrency gluttons. Demand is hotter than ever, and it’s only getting hotter.
The pandemic played a role in this demand surge, too. With the work-from-home surge came the surge in PC sales — you need a good PC to work from home. PC makers buy LOTS of semiconductors. Zoom, Teams, and other collaboration platforms became the meeting room, the water cooler, the schoolroom, and the family reunion all rolled into one. Demand for these services exploded. Since they are all running in the cloud, those aforementioned cloud services need more chips.
Semiconductors have a powerful ripple effect on products in other markets. If it has a plug or a battery, it is probably full of chips. If the chip supply is tight, these other products suffer delays or even cancellations. Your Ring doorbell, your new car, even a smart toilet need chips. I’m not exactly in the market for a $9,000 smart toilet, but hey, to each their own! Carmakers recently announced they had to shut down vehicle manufacturing lines because they couldn’t get the chips! The point here is that when the chip supply tightens, the whole economy suffers.
When Can We Expect This Chip Shortage To Ease?
Given the voracious demand for technology, semiconductor demand will continue to grow. I suspect the world can get by without a $9,000 smart toilet, but our smart vehicles will not revert back to dumb vehicles. Technical advances just don’t go backwards. While the human race will need more chips, the manufacturing capacity cannot respond to keep up.
Then the answer is to increase supply, right? Yes, but building a semiconductor manufacturing facility (aka, a “fab”) requires billions in capital investment and two years or more to construct. It won’t be fast or easy, but capacity is coming. Intel recently said it will spend $20 billion to build two new fabs in Arizona, while Taiwan’s TSMC plans to spend $28B. US President Biden recently met with a large group of tech leaders, including semiconductor CEOs, to discuss the need to build more fab capacity.
That last point highlights the geopolitical tensions at play in technology. The US and China have been entangled in an escalating trade war, with technology in the bull’s eye. Anticipating sanctions, Chinese tech companies hoarded chips and chip-making equipment that might not be available in the future. That stockpiling drained the supply. If sanctions tighten, US exports to China will drop further, spawning even more domestic expansion in China. Chinese tech companies like Huawei are already making lots of chips. The result will be a stronger Chinese supply, further escalating trade tensions. Still, even at China’s blistering pace of innovation, a sufficient Chinese supply is at least two years away.
Furthermore, industry consolidation left only a handful of companies that run chip fabs. Many chip companies have gone “fabless,” where they design chips but outsource the fab to someone like Samsung or TSMC.
The surging demand seems to have caught the chip fabs by surprise. Capacity has been increasing but not nearly fast enough to keep up. The pandemic temporarily shut down chip fab capacity. This caused a backup similar to the impact of the Ever Given fiasco on the Suez Canal. That chip backlog is still taking time to flush through.
Because demand will remain high and supply will remain constrained, we expect this shortage to last through 2022 and into 2023. The PC surge will soften a bit in the coming year but not a lot. Data-center spending will resume after a dismal 2020, and edge computing will be the new “gold rush” in technology. Couple that with the unstoppable desire to instrument everything, along with continued growth in cloud computing and cryptocurrency mining, and we see nothing but boom times ahead for chip demand.
Tech Buyers Need To Be Flexible, Patient, And Improvisational
As you buy new products, you may experience availability problems or price increases. If you do, you have at least eight options:
- Wait for the product to become available. Bear in mind that the wait time could be extensive — weeks or even months.
- Pay the increased fee. When supply is low and demand is high and you want it now, you could pay a hefty price. I’m facing this with lumber prices right now — yikes!
- Choose another configuration. See if there is a similar product available. Maybe it is a PC with an Intel processor instead of AMD, or maybe it has less memory. You could face option 2 here, as well. The configuration will be different, but is it good enough? If so, just get it; otherwise, return to option 1.
- Buy used. An alternative to option 3 is to buy used/refurbished products. The secondary market — the so-called circular economy — is hotter than you might know, and it’s full of good stuff to buy. I once even saw an old VAX-11/780 being refurbished for resale at an impressive HPE refurb facility, bringing back fond memories of my younger days!
- Choose another provider. If HP does not have your desired PC but the equivalent Dell is available, is it good enough? If so, just get it; otherwise, return to option 1. This applies to servers and plenty of other tech products, too.
- Spread the load with pools of tech resources. Much of your capacity is likely sitting unused. Typical enterprise data-center server utilization floats around 20–30%, while the cloud providers can hum along near 100%. They do this by pooling resources and orchestrating it all with a lot of infrastructure automation. You can do this, too, but it requires serious standardization, a lot of cool automation software, and, most importantly, a philosophical shift in how assets are “owned” and managed. This is a good idea even when you have a glut of chips, but if you can’t buy new gear, you may be forced into this mode. Do it regardless!
- Run to the cloud. Speaking of cloud providers, this could be your right move. They have plenty of capacity to serve your needs, and you can let them worry about the chips. It’s not always the right option, but it is often a good one.
- Cancel your order. As a last resort, you can cancel your plans and return to fight another day. This is certainly not the desirable outcome, but it is sometimes the right one.
Finally, prepare for vendors to use chip supply as an excuse to hide other problems. In many cases, it is completely valid, but when the chips are down (pun intended) in any scenario, people will often use the troubled times as a convenient scapegoat. Do your homework to understand the realities here and keep your providers honest. We can help.
Many thanks to Forrester contributors Naveen Chhabra, Charlie Dai, Brent Ellis, Chris Gardner, Abhijit Sunil, and Lee Sustar!