There’s no question that there’s a global shortage of computer chips. What we don’t fully know is how much of it is caused by hoarding. As with other essential supplies—toilet paper and gasoline, to name two—people tend to over-order when they fear running out. That generates phantom demand. Suppliers that don’t realize the demand is fleeting can ramp up production too much, leading to the bust in a boom-bust cycle. “We believe the industry may be over-shipping to true demand,” senior analyst Chris Rolland of Susqehanna Investment Group wrote in a client note that was cited by Bloomberg earlier this month.
Techies with long memories may recall that happening two decades ago to Cisco Systems Inc., which had bragged of its unique ability to see deep into its supply chain. It heavily ordered components to keep up with soaring demand for its routers and other networking gear in 2000, only to crash when its order book evaporated. It “ended up having to write off $2.2 billion in inventory and lay off 14% of its staff,’ BusinessWeek reported at the time.
Another famous example of panic-induced shortages was the long gas lines of the 1970s. By topping up tanks that used to be about half-full, drivers absorbed a huge amount of gasoline, helping to cause gas stations to run out.
Bloomberg’s excellent QuickTake explanation of the chip shortage makes clear that hoarding—politely known as stockpiling—is a factor in the shortage. “TSMC executives said in recent earnings calls that customers have been accumulating more inventory than usual as a hedge,” the article says. “PC makers began warning about tight supply of semiconductors early in 2020. Then by mid-year, Huawei Technologies Co.—a major smartphone and networking gear maker—began hoarding components to ensure its survival from U.S. sanctions that threatened to cut it off from its primary suppliers. Other Chinese companies followed suit, and the country’s imports of chips climbed to almost $380 billion in 2020—making up almost a fifth of the country’s overall imports for the year.”
That’s the part we know about. There could be more hoarding going on that’s not as obvious. Apple Inc., for one, stepped up orders to create a buffer. “There’s a chip stockpiling arms race,” Will Bright, co-founder and chief product officer at Drop, which uses custom chips in headphones and keyboards, told Bloomberg in February.
One of the few companies not having much of a problem with chip supply is Toyota Motor Corp., which has increased its ratio of inventory to sales in recent years—ironic, since Toyota led the world in the move to just-in-time manufacturing. Such a company, with extra components on hand, can afford to draw down its inventory when it has to. One that’s running super-lean is forced to place orders in the teeth of a panic. Not a good look.
When this shortage ends, it’s almost inevitable that some big suppliers and customers are going to wind up with excess chips on their hands. That’s not nearly as bad as being short. But it will go to show that as with toilet paper, gasoline, and Cisco routers, distinguishing real demand from phantom demand remains a vexing problem.
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March 19, 2021 at 10:03PM
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Why Computer Chips Are Like Toilet Paper and Gasoline - Bloomberg
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