No chips, high stakes?

In case you have not heard, there’s a chip shortage and no one can buy PlayStation 5s. But what does this mean for the AV industry? Hurrairah bin Sohail investigates.

There is a global chip shortage, and everyone is concerned. The automotive industry is braced for shortages and PlayStations have been in short supply since Christmas last year.

The blame for the chip shortage is laid at the feet of multiple factors from a worldwide silica shortage, factory fires, geopolitics to the pandemic. Is one more culpable than the others?

Stephen Metzger, vice president of hardware and operations at ZeeVee, says: “The issues with chip shortages began much before Covid-19, in early 2019 when the US pressured fabricators to cease production of chips manufactured for certain Chinese companies, such as Huawei. The knock-on effect of that was the fact that a lot of chips manufactured by TSMC for Chinese companies, including those built for HiSilicon, Huawei’s chip-making arm, were no longer available to system fabricators because of that governmental pressure.”

TSMC refers to Taiwan Semiconductor Manufacturing Company, arguably the world’s leading chip maker and fabrication specialist. As Metzger from ZeeVee states, TSMC was a critical component supplier for Huawei and as such its components were banned from use in USA as well which meant that no matter what your product’s country of origin was, if your product contained TSMC-built components for Chinese chip houses, use of those components meant your product was not welcome.

The banning of chip-fabrication by TSMC for certain Chinese chip houses had a constricting effect as Metzger elaborates: “In responses to this, system designers and manufacturers, such as ZeeVee, were forced to redesign a number of products very quickly, adding pressure on new components and supplies while we worked to design around components that were made scarce through this political move. The affected Chinese chip houses also moved their production from TSMC to SMIC where they could. Before Covid-19 even hit there were delays at SMIC because many of the Chinese chip houses were shifting to SMIC to allow them to continue to sell those devices where they could. Moving a chip design is no small matter, and only a small number of high runners make sense to move, based on the economics of doing so.”

David McIntyre, head of product management, Midwich, comments: “The deal with TSMC has certainly attracted a lot of attention. The AV industry has managed to navigate the situation and the good news for Midwich is that our customers do not appear to be getting the ‘short end of the stick’. We have not seen significant price rises and the feedback we’re getting is they feel supported and are receiving the information they need. This seems to be different to the consumer market where we are seeing reports about a range of impacts such as the Forbes commentary about a stock shortage of the PlayStation 5 for example, but the AV market seems to be rolling on.”

Peter Coman, chief technology officer at PTS, gives his perspective which seems to confirm AV’s resilience: “The only company that has mentioned anything about a chip shortage is Crestron. Now I don’t know if this a marketing ploy to try and get people to panic buy, but no other manufacturer has expressed any concerns.”

But if the germination of the chip shortage started in 2019, and the AV industry managed to roll with the punches, why are things beginning to come to a head now?

Metzger from ZeeVee offers an explanation: “With Covid-19, everyone was anticipating a big drop in the world economy and these forecasts led the chip manufacturers to cut back on fabrication schedules early on. However, demand did not fall off as predicted. Just the reverse occurred, in fact, sales of laptops, consumer devices and cars actually increased.

“The drop in demand for these products never materialised. But the ‘pipes’ of chip manufacturing take some time to turn off and some time to turn on. Due to the scaling back of chip manufacturers we started to see lead times for the chips we require skyrocket. For components that previously had a lead time of just a few weeks to a month now they bumped out up to 26 weeks nominally and in many cases they are now at 52 weeks to 56 weeks of lead time.”

As components are taking time to reach manufacturers, distributors are also having to extend delivery times. McIntyre from Midwich says: “Under circumstances like these, where we have absolutely no control or influence, all we can do is adjust forecasting. If our supply chain is to remain robust, we need to be cautious and realistic. We are pushing out from the traditional 12 weeks to 15 weeks, to 16 weeks.”

As a final take on the blame game, Metzger from ZeeVee says: “This is a completely artificial, man-made situation. It started with the political manoeuvring between USA and China and that started to put pressure on the system. The rest occurred when apocalyptic predictions and planning for pandemic-demolished economic demand turned out to be almost directly opposite to the actual reality. It was not the pandemic itself that caused the shortage. It was the inaccuracy of the planning. There is no natural reason for the shortage. The fundamental technology has not changed. The capacity is there. The materials are still available and producible. The balance of what is being built, when, and for whom has been disturbed by unexpected forces, geopolitics and the world pandemic. I hope that the shortage is temporary and that the market balances itself out and supply can efficiently match demand again.”

What’s the problem?

With the background of the chip shortage detailed, it is prudent to look into its specific impact on the AV industry.

Coman from PTS gives the heartening news that new projects do not seem to be bearing the brunt: “It’s business as usual for us. We had a lean 12 months since Covid-19, but the new projects that we’re working on probably won’t be affected as the timelines don’t align with this apparent chip shortage.”

Things are bit less positive on the manufacturer side. Metzger from ZeeVee has already highlighted that lead times for certain components have increased to 56 weeks in some cases. This in his opinion is the greatest impact as he says: “I don’t know how you design or roadmap a product when you have to wait a year before you actually get to test the components, but that is the reality of what we are having to deal with.”

He continues: “We’re essentially designing something a year in advance without actually having the components in our hands to test. We’ve obviously tried to anticipate what the next issue is going to be, and we’ve tried our best to insulate ourselves by making sure that everything is second sourced, but it is still an extremely difficult task.”

There is also the matter of quality as Metzger adds: “The big change we have had to address is the fact that Chinese and Taiwanese technology is wonderful. There are components that can’t be made anywhere else in the world, or they are fabricating them better than anyone else in the world and these products have become dangerously unavailable to us. As manufacturers we always want to make the best product possible but now we are having to account for geopolitical factors when selecting the technology we want to incorporate.”

Gamesmanship on the part of chip manufacturers is compounding matters. Metzger says: “Chip manufacturers have also used this as an opportunity to discontinue old chips. Broadcom is a great example because they have ‘end-of-lifed’ a number of their older chips and older technologies. Granted that the old fabrication lines are probably no longer economical to operate. But if you happen to need these end-of-life components for your products, then you have to stockpile and do last big buys.”

AV’s spot in line

When resources become scarce, they are rationed. Can the AV industry expect to get a fair share if the chip shortage becomes dire?

Metzger from ZeeVee says: “Of course not. What has been true for a long time is that AV guys have been on the low end of the totem pole. The smart manufacturers realised this long ago, and they changed how they design products. For example, we purposely use components that are also used by smartphone designs because that is a product vertical that drives chip production and technical innovation. The same holds true for commercial television and the automotive industry. Some of the vision systems being put in cars today are quite cutting edge and it is all done by high-end SoC’s. As AV manufacturers we have to stay abreast of developments in such verticals so that we can see what is driving the market and take advantage, and directly apply it where it makes sense.”

Regional considerations also come into play when talking about securing products. Michael Broadbent, APAC managing director, Midwich, says: “The high-level concern is regarding the allocation of products. If we take Australia as an example, in isolation it accounts for less than 2% of the global commercial AV consumption which is smaller than say the US market. If there are 9,000 display panels in the market and the US needs 10,000 and Australia needs 100, it might just be that the US gets 9,000 display panels and smaller markets may need to wait in line.”

It is fair to say that professional display shortages are certainly being forecast by the AV industry and the display shortage could signpost things to come. Sean Tobin, chief operating officer, Midwich, says: “The general commentary from the industry points to shortages in the professional and consumer display segment. Broadly speaking, panel vendors are focusing on the manufacture and supply of profitable products, hence LCD monitor supply is impacted differently to LFD and TV categories.”

Managing risk

Interesting to note is that the nature of the APAC market provides some protection. Tobin from Midwich says: “In APAC, we’re used to having 12-week lead times for panels, while the European or US markets operate from consolidated distribution and fulfilment centres where lead times are often much shorter. In APAC we’re used to patiently waiting for stock and any interruptions to supply chain are sometimes par for the course.”

Following the disruptions to business witnessed globally throughout 2020, it would seem risk assessment is now the operative angle. Broadbent from Midwich reflects: “We’ve been dealing with project delays since 2020 so it has become a strange kind of norm. The biggest challenge arises when we buy stock with an expectation that a project will proceed, and we try to consider our customers’ needs and match their forecasts. When something shifts, and the project deadline moves, that can place distributors and suppliers in a difficult spot. Of course, we can’t swing in the opposite direction either because when a project is greenlit, we have to be ready to help. There can be a risk either way, but our job is to continually assess the risk.”

Tobin adds: “As David mentioned, interruptions to supply are beyond our control. For us it really is part of doing business and it’s what we do. We’ve seen the supply chain wobble for various reasons before. All we can do is put in robust, strong, longterm forecasts. As a distributor, we know that the vendor is just as motivated to get us the stock as we are to getting it to our clients. At present all we can do is give our customers and our vendors as long-distance a view as possible so we can tackle the issues together.”

To conclude, Metzger from ZeeVee gives his thoughts on how the chip shortage might play out down the line: “We’re creating a compound effect at present. From our perspective, we are being given 52 weeks lead times to receive orders. At the same time, we are being forced to accept non-cancellable, non-returnable [NCR] terms on our chip purchases. It is extremely difficult from our end to forecast demand and consumption of components that far down the line. But these components are integral for us to build our products so we, and others I would assume, will end-up over-buying because we all need to be able to build products for our own markets and cannot do so without these chips.

“Due to the NCR terms, we will have to probably purchase a lot more material than will actually be needed to build our end products a year or so in the future. We can’t afford to be caught short. Instead of an Armageddon, I’m anticipating a glut in a year or two. Right now, consumers of chips are being forced to over-buy, but will someday be looking to recoup that excess investment by selling off chip surpluses that were purchased defensively.”

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