On this special episode of The Six Five Webcast hosts Patrick Moorhead and Daniel Newman explore what is causing the global chip shortage, the impact it’s having on the tech industry and the world at large, and possible solutions.
Chips are in every piece of technology that we own. If the semiconductor companies can’t keep up with demand, this could spell disaster. But will it? Listen to the podcast to find out. And while you’re at it, be sure to subscribe so you never miss an episode.
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Patrick Moorhead: Hi, this is Pat Moorhead, with Moor Insights and Strategy. I am here for a Six Five Live TV show with my co-host, Daniel Newman, who is in a suit coat. Normally, he is in a sweatshirt or some workout gear, but Daniel, what the heck is going on here?
Daniel Newman: Well, first of all, everybody, if you’re watching this and you’ve just tuned into us live, it’s Patrick’s birthday. And this with Six Five Live, this isn’t going out on her podcast. We can have a little more fun today. So, feel free to shoot some notes in, I’d love to see everybody wish Pat, flood the stream with happy birthdays. Let’s keep him distracted from the task at hand. But no, I was supposed to actually be traveling to Techsys today. Techsys, where I’m moving.
Patrick Moorhead: That’s Techsys, T-E-C-H-S-Y-S, right?
Daniel Newman: Tech Systems, baby. Let’s trademark that, but I canceled. So instead, I flooded my day with television appearances. Just got off a great conversation with the very, very intelligent Morgan Brennan from Power Lunch, where I realized I have a very round head, but anyways, no. And so, I’m wearing a suit because it’s Friday and I thought it was going to be a light day. Was not, but actually, talking-
Patrick Moorhead: No, you didn’t Just do CNBC Power Lunch, you also did Yahoo! Finance as well. Where you talked about the same thing, chip shortages and …
Daniel Newman: Making the rounds, man. I mean, today was the day-
Patrick Moorhead: Yeah, I mean I did a lowly NPR this morning, so I’ve got a good face for radio, but Daniel, let’s jump in here.
Daniel Newman: Yeah buddy.
Patrick Moorhead: You and I talk a lot about these chips shortages and I think a lot of the conversations started with the automakers putting down their lines, but maybe a great place to start. I think what you and I are both getting hit with is what is going on out there? How long do we think we’re going to be in this? And then there’s this side conversation, which actually has nothing to do with the short-term chip shortage, which is about domestic manufacturing. But maybe we can jump in and talk about a little on the demand side. It’s funny. Some things are really easy to you when you do them every day and you’ve done them for a long time. And this one seems pretty straight forward to me, net, there’s been a tremendous increase in chip demand for certain sectors. There were other sectors that were supposed to crater because of COVID, those didn’t crater. Then you had some people who were getting funny with their own forecasts.
Daniel Newman: Yeah, Pat, I mean, actually, I got to give you credit. I don’t know that anybody’s done a better job of turning this whole thing into a fun story than you have. And-
Patrick Moorhead: Thank you.
Daniel Newman: Well, I think many of us that track this space, understood what was happening. The way you basically said, this whole thing, emanated around COVID and the impact. And COVID has been like, if you charted it, right? As a hype cycle, it’s had its own hype cycle. And in the beginning of COVID, the scale was, everything is going to collapse. The world is going to end, business is shutting down, supply chains are stopping. Nobody’s going to buy cars. Nobody’s going to buy mobile phones. Nobody’s ever going to school again, businesses are all going to go out. And there were some of that. Some companies really struggled, and some industries, of course we’ve seen have struggled and continue to. But there was a lot of, in the chip space, and you said, let’s just do the storytelling, right Pat?
Patrick Moorhead: Yeah. The reality was that COVID drove the need for a lot more PCs and a lot more PC peripherals. And I think we saw it ourselves. People who had PCs wanted better PCs, multifamily, multi-dwelling households didn’t want to share devices. And we couldn’t go out to the movies. We couldn’t go to our friend’s house, so we wanted better entertainment inside. So, what I’ll have you look at is the industry had zero PC growth since 2011. And I might go all the way back to 2010 at 17%, but check out that curve at 11% growth, that is truly on unprecedented. And by the way, thanks to our friends at Canalys for letting us use this. And then let’s drill down on the fourth quarter.
Look at that, 25% growth in an industry that everybody talks about as dead, okay? This is anywhere from dead. So, you can imagine all of these companies chewing up all of this demand at the same time that smartphones, sure they went down and they declined but they didn’t die. And then the automakers, who share a lot of the same components, decided, “Eh, we’re going to push out our forecasts.”
Daniel Newman: And I think that’s what a lot of people misinterpret though, Pat, too, is that it’s not one device, one chip. I mean, a vehicle could have dozens, hundreds of semiconductors to run it. And a lot of people also don’t really know the difference between when I say, legacy, edge, and leading edge. And so, you have some chips, simple microcontrollers and things that require very low power, very little that are done in certain kinds of fabs, right? And then you’ve got your leading edge, your five nanometer chips that are going into smartphones or the stuff that Apple’s developing for its M1 processors that are going into it’s MacBooks. It’s on the leading edge technology. And the point of it is though is, in the beginning of this pandemic when everybody assumed that everything was going to stop, they went to the fabs that were already, by the way, under pressure for capacity and said, “you know what?”
I’m GM, “Our numbers are going to be way down this year. Hold up, slow down manufacturing.” And smartphone makers did the same thing. “We’re not going to need as many iPhones or Samsung devices or HONOR Phones” or whatever they are. And so what ends up happening is you got the TSMs and the Samsungs and the UMCs and whichever, all the foundries. And basically, what happens, well you’ve just moved out of line and someone else moved up the chain, that had more need like Toyota. Toyota’s like, “Keep making them. We’ll stockpile them. We know we’re going to need them.” Toyota’s in good shape right now. GM, not so much.
Patrick Moorhead: And a lot of times, Daniel, we’re just talking about the semi-conductors by the way, thank you, Hunters Advantage. We talk about chip shortages, but it was also display shortages. So, talk about a market we all thought was dead. Check out the tablet market, and tablets and auto displays share most of the same components. I know most of us don’t have a 13-inch display or a 20-inch display, like a Tesla, but they have a small display. And the reason that auto display is the same form factor as a tablet is because it is a tablet display, and check out what happened to tablets this year. They skyrocketed. Tablets in China are off the rails, Daniel, in terms of a personal content consumption device, because they couldn’t go outside. Chromebooks, boom, here we go. So with all of-
Daniel Newman: Very easy to explain, by the way, Pat, why Chromebooks exploded. We took all of our learning online, and every student that didn’t have a Chromebook, in order to get school back, once we realized you weren’t going back, the Chromebook is one of by far the biggest winners of the pandemic. By the way, I acquired a few new tablets during this period of time. For me, it’s become a viewing device just for walking shows. It’s just a little better than the phone and it’s not as cumbersome as the television. If I want to watch something while I’m sitting at the kitchen table, in my bed, easier to watch it on a big tablet sometimes, than watching it on a big TV.
Patrick Moorhead: Yeah. The other big Chromebook driver was in the first and second quarter, if you’re trying to get your employees back home and being productive, you and I take it for granted that we can work anywhere, but the rest of the planet doesn’t operate like that. Think of governments just in itself, who have never had work from home. And then there was this mass scramble for everybody to get a device they could use in their home. People were buying used PCs, people were buying stuff they could pick up at Best Buy. And there were a lot of enterprise who decided, “Hey, you know what? We’re going to take advantage of this time to give Chromebooks a shot.” I mean, look at the growth of Chromebook markets and how it rose through the quarter. I mean, we went from, it looks like to be around three million to what we’re up to in the fourth quarter, which was more like 12 million, right?
That is parabolic increase in volume. And I think for my final, if I didn’t make my point enough, here’s the smartphone curve where we saw first and second quarter were definitely depressed. I think there were a lot of people that were worried about budgets, home budgets, were they going to have a job? And smartphones, weren’t a direct alignment to that, where PCs were, but checkout the third and the fourth quarter. You have the 5G effect and you have the Apple effect in motion. So, pretty awesome stuff. So, now the auto industry, who has cut their forecast, I don’t want to say whining because this is a … oh, here’s TVs, by the way. Check out the TV growth as well, where you can’t go to the theater or you can’t go anywhere and you’re going to buy better home electronics. And then you had the auto folks who decided that they were going to get out of line with every one of these other sectors scrambling for this. And unfortunately, they had to close their manufacturing lines because they couldn’t get the semiconductors.
Daniel Newman: Yeah. I mean, I guess it was same show, different day for these folks. This industry has been hard hit over the years, and it is an industry that when disposable income goes down, when we go into recessions, people don’t buy new cars. And then we’ve seen what’s end up happening is we’ve seen a massive spike in demand. We also saw demand because of overall plants being closed, less vehicles were made for a period of time. So, all that pent up demand started coming back as dealerships were able to open again, as people started to want to buy.
That is what stimulus is supposed to do. People put that back into the economy. I mean, look what’s happening with the real estate markets, the automotive markets, it’s hard to get some of these things, vehicles and housing, which housing has nothing to do to chips. But the point is that the overall idea that this pandemic was going to shut down all this buying behavior actually ended up wrong in almost every industry, except for a few, travel and hospitality. And overall though, Pat, I mean the same show, different day thing became a problem. So like I said, a few of the companies were a little bullish. They dug deeply into the resources that they had at their disposal, and they kept manufacturing chips knowing that the demand would return.
Patrick Moorhead: Right. I think Stephen DiFranco makes a very good input, at yeah, we have been here before and Stephen and the audience remember the resin factory for memory chips, that burnt down in Japan, right? We saw the same thing. So, that brings us to the big question here, which is how long, you were asked, I think on CNBC today, how long are we going to be in this?
Daniel Newman: Well, Pat, like I had said, I mean, you’ve got some of the best minds in the business that are looking at that exact question. And I would trust what Lisa Su said, at AMD, I’m sure she’s got some of the great minds. And of course, we’re looking at some of the same data and a lot of them seem to think it’s about mid-year. And there’s some variability in that, but you got Biden presenting a plan that they’re going to spend a hundred days evaluating this. So, when we talk about shortages and we talk about, and I know the next thing, bringing manufacturing back, we really do have two conflated issues right now. We have an issue of a temporary shortage that will likely not be fixed in the short term, just because you can’t make changes to this supply chain that quickly.
Patrick Moorhead: Oh, and by the way, where Lisa’s coming from, and I sit in the same boat is I believe that the way this is going to get fixed is demand getting back to normal levels for the PC market.
Daniel Newman: Yeah. And-
Patrick Moorhead: And that’s where this is coming and we’re still playing a little bit of catch up for people who didn’t get the devices that they wanted, and there, believe it or not, are still people outfitting and getting better at this work from home game. So, it’s really about PC growth getting out of crazy land, of 25%, and maybe more to normal three to five percent growth. But like you were saying-
Daniel Newman: So, what happened though that stays-
Patrick Moorhead: There’s no magic bullets here.
Daniel Newman: What happens if it stays? I mean, we probably have a-
Patrick Moorhead: Oh, I mean the industry is screwed. I mean not screwed, but we’re going to have product outages pretty much everywhere. And then you have to ask yourself, “What’s the lead time of building a new fab,” right? And that’s multiple years and multiple billions of dollars within. I know you and I were laughing, even though one has absolutely nothing to do with the other, a lot of questions on do we need more domestic manufacturing, which by the way, awesome audience, has nothing to do with the question of short-term supply.
Daniel Newman: Yeah. Well, I mean, of course, Pat, we don’t know that it’ll slow down. We don’t know for sure. I think there’s some level of safe assumption that we’ve had some buying pulled forward. We’ve had some cloud buying pulled forward because of the exponential growth of cloud services. But Pat, you and I said January 2020, before COVID, I think we actually did a podcast or something like semiconductors will eat the world. We were saying this before COVID, that the chip demand is going to explode because of the demand for SaaS, because of the demand for devices, because of the way we are doing things, the TikToks and Twitters and everything else we do all day, the cars we want to drive, autonomous vehicles, all of it being driven by demand.
And the sooner we get on top of fixing this, and bringing demand home the better. And something I did talk about, and maybe some we can wrap up on here, Pat, and I’d love to get you to weigh in on this is I feel like the industry and a lot of the media’s conflating two semiconductor issues that are happening concurrently. You’ve got the shortage that’s going to last six plus months, depending on the continued demand that we just talked about. And then we have the national security and economic impacts of trying to scale and bring certain manufacturing back home. I think you had a really good take on that. And I think a lot of people are pretty interested in that second side of the story. So, why is it-
Daniel Newman: Still important that we bring it home? Why is it?
Patrick Moorhead: Yeah. So there is, and this is to me, what the Biden proclamation is all about, and that is having more US chip making, leading edge chip making on US soil. And it comes down to national security. So, the three current basis of chip manufacturing is South Korea, Taiwan, and China. And the US still does manufacturing, GlobalFoundries is a big player here. Intel has fabs, Micron. But with that said, it’s rapidly deteriorating. And with the political environment deteriorating in the South China Sea, and the fears that the administration and the prior administration had on China dealing with Hong Kong and thinking, are they going to make a grab for Taiwan? And then you realize that in Seoul, and most of South Korea is within Cannon or missile shot of North Korea.
And you add that finally to Intel’s current waning supremacy of leading edge, right? The leading edge went somewhere else. It’s freaking a lot of people out, and I think it should. And you talked about this on CNBC, all it takes, it doesn’t mean that we have to have American companies doing it, it means that we need who’s ever good at this to build their factories in the United States. So, at a minimum, we have physical security. Now I would have loved to have seen GlobalFoundries get injected three billion dollars to finish out seven nanometer EUV, but the government screwed up. They watched that evaporate. And that was the dumbest thing I’ve seen under the Obama administration, related to tech, that they just allowed that to go away. And I think their premise was that they were going to let … that Intel was going to be the godchild, and by the way, it was a really good bet because Intel had flawlessly executed for a decade.
Daniel Newman: Yeah, absolutely. We need to bring it back here. We need the experts that know what they’re doing to bring it back here, to lead the development. And Pat, we talked about this offline, but you make such a good point. And this is really what people need to understand is the semiconductor industry is an ecosystem. It’s not just going to create jobs for people working in fabs. It’s going to-
Patrick Moorhead: That’s right. This is not a giveaway here.
Daniel Newman: Yeah, I mean you said, I believe that when we’ve had Mr. Caulfield, CEO of GlobalFoundries, on our show, and he’s talking and he’s shown the economic return. I mean the billion dollar code that he’s injected-
Patrick Moorhead: It is amazing. For all the bad investments that our governments make, I look around. Well, first of all, let me just say that every leading edge fab, for the last 20 years, has been co-funded by a government. I mean, when I was at AMD, fab 300, which was in East Germany, was partially funded by the EU and Germany, right? And every subsequent fab, so first of all, it is a gambling match, sorry. And the reason it is, is because it’s not a payoff, it’s an investment, because what happens is you might have 50 to a hundred other companies, actually the numbers more about a thousand if you’ve been in a fab, that is going to build the fab, maintain the fab, fill the fab, as opposed to just looking at, “Oh, the 1800 workers that it’s going to take.” So, what I loved about Tom, and we should have him on the show again to talk about this, but the New York, Fishkill and the entire facility around there, to leading edge fabs, ended up to be a net adder for New York, for taxes and business.
Daniel Newman: Yeah, absolutely. And that’s something that I’m hoping the Biden administration is taking feedback, asking these questions, looking at the subsidies and looking how it creates jobs at the OEMs. It creates jobs in manufacturing and distribution. It creates jobs in ecosystems. It is an opportunity. And it’s one of those high tech type of leading edge manufacturing businesses that the US could do, and could use to create high paying jobs. And I think we’ve off-shored a lot of it. We off-shored so many other things, Pat, but this is something that we could certainly bring back. It could certainly, at the very least, make sure that a shortage like this couldn’t happen to the same magnitude, meaning we’re never going to be perfect.
Forecasting isn’t perfect. And even all the AI in the world, you still can make some mistakes because you can’t put every single variable into an algorithm and be a hundred percent sure you’re going to get this right. But we really did not de-risk very well here. We did not de-risk very well. And we’ve seen this coming for some time. And as you mentioned about what GlobalFoundries could have done, there’s been opportunities. We’ve fumbled the ball. And now here we are.
Patrick Moorhead: By the way, I’m totally with you on the fumbling the ball on GlobalFoundries. But one thing I don’t think anybody could have ever thought through is we’d have a global pandemic and PCs, that had 0% growth, 5% decline, would go to 25% growth. You know what I mean? Nobody’s spreadsheet can figure that out. Now, by the way, if I look historically, what these instance do is they do drive to an oversupply. So, what I think is going to happen, I think we are going to respond. We are going to get it into an oversupply position, and then we’re going to be saying, “God, why did we build all these factories?” Anyways, we’ll have to tune back in, in five years to see what happens here, Daniel.
Daniel Newman: Absolutely. Well, for everyone out there, thanks a lot for tuning into this episode. This is a little bit ad-hoc. Again, it is Patrick Moorhead’s birthday. So, let’s get those Tweets coming. Let’s get those happy birthdays going. Pat is constantly a wealth of knowledge. And when it comes to semiconductors, this guy has got more in him than I have years on this earth. So, make sure we definitely tune in, hit that subscribe button, join us here, join us on LinkedIn. Join us on Twitter. Join us on Spotify, and Apple, and YouTube, and everywhere else that we are. We really do appreciate our community. For this Friday, ahead of this long president’s day weekend, it’s time to say goodbye to all of you. But thanks a lot for tuning in. We’ll see you later.
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