Chip shortage could soon turn into avalanche

The persistent shortage of semiconductors that plagues manufacturers of everything from cars to smartphones is starting to ease. Rising production, faltering demand and the so-called bullwhip effect could soon turn the chip gap into a supply glut.

Volkswagen, Europe’s biggest carmaker, said on Tuesday that the shortage was easing and that it would increase production of electric vehicles in the second half of the year as a result. Prices for graphics cards used in cryptocurrency mining and gaming PCs are mostly sold at list price (the manufacturer’s recommendation), after having commanded hefty premiums during the pandemic, according to 3DCenter. Samsung Electronics, the world’s largest chipmaker by revenue, in early June asked its suppliers to cut shipments due to inventory buildup, according to Nikkei Asia.

The industry has begun to flood the market. Chipmakers plan to invest $185 billion worldwide this year to boost demand, according to estimates from Gartner Research. That’s more than 20% more than last year, and a huge jump from the $110 billion invested in 2020.

Demand has also been affected. China’s lockdowns have dampened interest in buying new smartphones, and weakness in that huge market will help the world break even on chips sooner, Qualcomm Chief Financial Officer Akash Palkhiwala said in June at a conference. Bank of America. A global recession would further hit demand.

Something called the bullwhip effect could accelerate this change. Small changes in demand can cause big changes at higher levels of the supply chain. Automakers, for example, don’t want to disappoint customers with an empty lot, so they will order more chips from companies like Infineon Technologies. And that company will ask more of its suppliers for the same reason. And what’s worse, companies may double their orders just to make sure they get some supply if parts become rationed. This year, automakers and major suppliers were expected to order chips to build some 120 million new cars, more than 40% of forecast sales, McKinsey said.

If manufacturers realize they have too much supply, and cancel orders, the effect reverses and amplifies up the chain just as quickly as everything stopped. The semiconductor shortage could soon turn into a supply glut.