Does the Current Semiconductor Shortage Represent a Real Demand, or Is It an Illusion Caused by Overbooking?

Now that the chip shortage has persisted for more than half a year, markets and industries are closely monitoring whether chip demand is as strong as expected, or whether the current shortage is a mere mirage caused by overbooked orders from clients in fear of insufficient components.

At any rate, analyzing the current chip shortage entails doing so on both the supply and the demand ends. First of all, with regards to the demand for automotive chips, which has been in the spotlight for the past two quarters, automakers first began suffering from a shortage of automotive chips last year. This took place because automotive electronics suppliers, which had historically maintained a relatively low inventory level, slashed their chip orders placed at foundries ahead of other foundry clients at the onset of the coronavirus crisis in early 2020.

Hence, once automotive demand saw a sudden upturn later on, these automotive electronics suppliers found themselves unable to place additional orders at foundries, whose production capacities had by this time become fully loaded. Automotive chips subsequently began experiencing a shortage as a result.

At the same time, demand for CIS, DDI, and PMICs skyrocketed owing to the global 5G rollout and to the spike in demand for PCs and TVs caused by the proliferation of WFH. Given that foundries had already been experiencing fully loaded capacities across their mature technologies required for fabricating these chips, most clients had no choice but to resort to upping their volume of chip orders in orders to ensure that they are allocated sufficient foundry capacities.

Brands’ order placement strategies

On the other hand, several brands of electronic devices have been overbooking their chips to mitigate the risk of the chip shortage that began last year as well as the increased shipping times. These brands span the notebook computer, TV, and smartphone industries.

Of these three industries, smartphone brands have been overbooking foundry capacities due to the aforementioned expectation of chip shortage and most smartphone brands’ ongoing attempt to seize market shares left in Huawei’s wake. It should be pointed out that, however, in response to lackluster sales during the May 1^st Labor Day in China, most brands have now lowered their production targets.

Foundries, on the other hand, had already been experiencing fully loaded capacities due to high demand from various end devices. Hence, they were unable to reach the volume of orders that were overbooked by smartphone brands despite adjusting their product mixes and reallocating production capacities. As such, although smartphone brands have lowered their production targets, capacities across the foundry industry remain fully loaded.

“Brands are responding to the market situation by strategically procuring components. Even if they were to adjust their production targets, they could still adjust their purchases of raw materials and consumables. Actors in the supply chain are unlikely to rigorously examine the inventory levels of brands before any unexpected changes occur in either demand or material shortages”

Conversely, with regards to the notebook and TV industries, they had mostly experienced bullish demand in the past few quarters, meaning sales performances are mostly a non-issue. Their procurement efforts have thus been focused on taking stock of the supply of raw materials and consumables, and these efforts have been guided by a principle of stocking up on demand. This is in accordance with both the bullish sales and the expectations of the companies themselves.

Generally speaking, TV and notebook use the term of strategic stocking as an excuse to mitigate any doubts of rising inventory levels from market observers. For the supply chains of these industries, the current state of the market is primarily dictated by the demand side. Actors in the supply chain are unlikely to rigorously examine the inventory levels of brands before any unexpected changes occur in either demand or material shortages.

Taken together, the supply and demand situations of the notebook, smartphone, and TV markets, in addition to the capacity utilization rate of foundries, would seem to indicate that the inventory adjustments caused by overbooking is unlikely to taken place in the short run, contrary to the market’s fears. TrendForce currently expects the shortage of foundry capacities to persist at least until 1H22, only after which is the supply and demand situation in the semiconductor market like to gradually return to an equilibrium.

（Cover image source: Pixabay）