While lead times for semiconductor chips are to remain high this year, it could normalise in 2023, said Moody's Analytics economist Tim Uy. Inevitably however, prices will go up.
Chips being made at one of TSMC's fabs
In their latest report titled “The Uncertain Future of the Chip Shortage”, Uy said that for the most part of the last couple of years chip lead times have been increasing, but last month is the first time since the start of the pandemic that this key metric fell, from 27.1 weeks to 27 weeks.
“While the decline is notable given the upward trend in lead times for the past couple of years, 27 weeks is still far from the norm, and we expect lead times to remain elevated going into 2023.” Lead time here refers to the time it takes the chip to reach the end consumer.
What made the whole issue worse?
One of TSMC's many fabs. This is in China, and 12-inch silicon wafers are produced here
At the heart of the chip shortage issue is that the world's advanced chips (7nm or smaller) are mostly produced in Taiwan and South Korea, and there are “significant entry costs” required to penetrate these markets.
The pandemic also accelerated the pace of digital device demands, and so does increased electric vehicle (EV) adoption. EVs require more advanced chips, and can require up to 10 times more chips than older cars.
The Li Auto L9 EV SUV touts Qualcomm Snapdragon SA8155P chips as a selling point
Which chips are produced also leads to the problem. Though older chips still make up over half of all chips manufactured, largely because more chips are needed where they are used, they aren't made any more than newer chips.
“Despite this, hardly any new capacity is being created for older chips, the reason being that advanced chips have been a larger revenue driver for the biggest chipmakers,” Uy says in his report.
The L9's chassis
Geopolitical and climate events – China's zero-Covid policy and its intermittent lockdowns, Taiwan's drought, a factory fire and earthquake in Japan, an ice storm in Texas, and the Russia-Ukraine war – have also contributed to the imbalance of chip supplies.
What to expect in 2023 and beyond
Even your regular Honda Civic will have hundreds, if not thousands of chips
This chip shortage has affected the global economy and spiked inflation in many countries, so a price hike is inevitable.
“Both Intel and TSMC have indicated that they are rising prices later in the year and in 2023 because of rising raw material and production costs,” as demand for automotive and data centre clients remain strong. The automotive market is the fourth biggest customer for chips, after data processing, communications, and consumer electronics.
According to a Deloitte study, it's estimated that automotive electronics make up to 40 percent of a car's cost, comprising of things like engine management, fuel injection, transmission control, modules for lights…it's a long, long list, and that's before we go to cars with fancy ADAS and all that.
Putting two and two together, this increase in production costs is almost certain to translate to pricier cars too.