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What’s behind the global chip shortage

Daniel Newmann, Futurum Research Analyst joins the Yahoo Finance Live panel to discuss the chip shortage.

Video Transcript

AKIKO FUJITA: The White House is vowing to address the global semiconductor shortage. President Joe Biden expected to sign an executive order in the next few weeks that would call for a comprehensive review of supply chains. The White House also expected to consider incentives to bring manufacturing of these chips back to the US. Let's bring in Daniel Newmann. He is a Futurum Research Analyst. And Daniel, let's talk first about how we got here.

Because we have heard a lot about the demand in consumer electronics that have really accelerated throughout the pandemic. But there's also the trade element of this. And I wonder how you sort of balance the two when you try to make sense of how we got here. Is it more about the Trump trade policies? Is it about just this unexpected demand that has spiked over the last year?

DANIEL NEWMANN: Yeah, it's great. I mean, you can't really pinpoint one thing and say it's all on that. But if I had to take a stab at that, I would say the challenges that we're experiencing really emanate from COVID. So what you said about the pandemic, I mean, COVID's driven unprecedented demands for PCs, cameras, keyboards, displays. People who had PCs realized they needed better PCs. Households realized they couldn't operate with only one or two and added more PCs.

And there was massive growth. In the last quarter, there's numbers as high as 25% growth that are being touted. And COVID did other things. It drove behavioral changes. We ate out less. We didn't go to movies. But where did that money go? It went into home electronics, smart TVs, streaming, gaming consoles. And by the way, in the beginning of this pandemic, everyone was supposed to stop using mobile devices. We weren't going to sell a lot of phones because we're going to sell more PCs. But that actually didn't happen either.

And with the 5G cycle and new devices from Apple and Samsung, we saw acceleration there. And then the last piece, by the way, because we're hearing so much about automotive now, is that early in the pandemic, all the automotive manufacturers, they cut forecasts. They said, we're not going to sell as many cars. Well, this meant back of the line for all of the Legacy chip manufacturing that are used in vehicles as well as the leading edge stuff. Well, there was a temporary dip in the beginning of the pandemic. But automotive sales kind of roared back. And when these companies saw that demand roar back, they basically went to the back of the line.

So now with the limited capacity, with TSM, Samsung, and many of the other overseas semiconductor fabs, there is no way to speed that up. So other than those that kind of stockpile, like Toyota did this and was able to talk about that recently, companies that kind of had to revise their forecasts in a big way got hit hard by going to the back of the line.

AKIKO FUJITA: Yeah, I mean, to that point, we've heard the warnings among executives, especially in the auto space. GM earlier this week saying that the shortage could lead to their earnings being cut by up to $2 billion. What are you hearing on the ground though right now about how far out this shortage extends? Where does the backlog go? Are we talking a few months right now are we talking up to a year?

DANIEL NEWMANN: Yeah, I think it lands right in between there. I mean, some of the executives like AMD's Lisa Su has thrown out the number of about six months. And that's the rumblings that I've been hearing on the street from a few of the other key execs from the big semiconductor makers. So it puts us somewhere into the middle of the year. And so that, of course, could be accelerated through some different actions. And I think that's what Biden and his administration is looking into right now, is what are the possibilities?

What could investment do? Because a lot of that, like bringing jobs and onshoring that's not going to bring a short term spike in availability. But they're exploring right now, where are there constraints? And what could possibly be done to make more availability in a shorter period of time?

ZACK GUZMAN: And Daniel, the other interesting piece of this too is it's kind of how maybe the shortage impacts the probability of some of these mergers and acquisitions getting approved. And those already look shaky as is, whether you're looking at Nvidia and Arm or some of the other ones. I mean, talk to me about how maybe that pressure and the shortage, politics, playing a role in all these.

DANIEL NEWMANN: Well, every one of these big mergers and the ones that probably come most to mind would be, of course you mentioned Nvidia and Arm. You've got AMD and Xilinx. You have Marvell and Inphi. Those are some of the larger moves being made right now in semiconductors. Of course, anything at the size and scale with national implications like it has in the UK for Arm is going to get scrutiny. We've heard about that recently. There's no chance that the industry isn't going to want that to be very closely looked at to see what it does to competition.

What I don't know is that you can truly link the availability and the shortages to these mergers and acquisitions, as in, does the fact that we are dealing with supply constraints give a reason to not allow these mergers to happen? I think those really need to be looked at through the lens of competition and the impact to the consumer. And I think in the short run, we really need to be, of course looking out for the consumer through making decisions, having regulators around the world look at these mergers and acquisitions. But when it comes to the shortages, I mean, these are real, I mean, some of these challenges are really significant because what it really starts to do is it flows down to jobs.

If you see GM or Honda start cutting production, cutting jobs, cutting shifts. These are hurting union jobs and jobs in the middle of America, the part that we're really trying to solve with the stimulus right now. So getting this rectified, both short and mid-term, is going to have to be something that comes out of this. And like I said, it's going to be hard to fix it in the six month window or so. But how do we prevent this from happening again?

AKIKO FUJITA: Yeah, I mean, there's the long term play, which we've heard from the Semiconductor Industry Association talking about substantial funding that's needed to incentivize onshoring. But that's not something that's going to happen overnight. In the meantime, there's concern to your point about the impact downstream. What sector's most vulnerable right now? Is it the PCs? Is it the game makers? Is it the data center, server makers? Where are you going to see the most significant impact?

DANIEL NEWMANN: I think the interesting thing is there's only so much supply. So the impact ends up getting spread around to all of the different-- because you've got leading edge, so you've got the seven nanometer and five nanometer process that's going into your latest smartphones, your latest PCs, and data center chips. And then you have more Legacy. A vehicle might have dozens-- hundreds of chips that some are simple microcontrollers and some are very advanced ADAS systems. And so like I said, you've got these UMC, Samsung, TSM, and these different foundries, these offshores, and their total capacity, total productions are limited.

And so it's sort of depended on the stockpiling that these different companies did. I mentioned Toyota. Toyota is in better shape, had stockpiled more, where other companies when they cut their forecasts, cut their manufacturing for periods of time, and now they're waiting in the back of the line. So we've heard Sony say, the reason you can't get a Playstation 5 is because we're short on devices. Qualcomm in its recent earnings said, we would have blown our numbers out for devices. But right now, there's supply shortages. However, like Qualcomm for instance, does a lot of its own manufacturing for its RF chips. And you saw the numbers there were much stronger.

Well, it controls more of its destiny. And I will point out it's kind of interesting looking at Intel and the whole Dan Loeb situation, which I had talked to a few guys about just a few weeks ago. This sort of impasse makes it look like Intel's decision to keep a greater control of its overall supply chain could end up faring very well for the company long term, that it isn't entirely dependent on this sort of fabless approach.

ZACK GUZMAN: Yeah, that's a very good point. And also to your other point, we saw the same warnings from GM and Ford. Interesting to see where team Biden will go to make good on some of these pledges. But always love having you on. Appreciate you coming on to chat again with us. Futurum Research Analyst Daniel Newmann. Thanks again. Have a good weekend.