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1. During the pandemic, consumer durables went from ~10-11% of consumption to ~13%. 3 percentage points of consumption is about half a trillion dollars annually
by TradingPlaces 5y ago
1. During the pandemic, consumer durables went from ~10-11% of consumption to ~13%. 3 percentage points of consumption is about half a trillion dollars annually. Many of these durables come with cheap microcontrollers or even high end SoCs now. New vehicles have dozens of cheap microcontrollers. https://fred.stlouisfed.org/graph/fredgraph.png?g=Ktkq https://fred.stlouisfed.org/graph/fredgraph.png?g=Ktkq
2. If you look at that chart, you will see that the decade previous to the pandemic was the worst ever for durable goods demand. Supply chains had adjusted to that.
3. Supply chains had also all gone to a JIT model to keep inventories lower. This was a huge source of efficiencies, but made them vulnerable to a demand shock.
4. There are new sources of chip demand in EVs.
5. There are new sources of chip demand for very cheap ARM and RISC-V chips. High volume, low margin stuff that has been underinvested for manufacturing, like the entire auto chip chain.
6. 2019 was a down cycle, and companies were idling capacity.
7. When the pandemic hit, companies projected lower demand, and idled more capacity. This put them in a huge hole from which they still have not extricated themselves.
8. COVID outbreaks in Asian factories complicate things
9. Transportation bottlenecks complicate things
- TradingPlaces 5y agoAlso, to answer your other specific questions… 1. Yes, everyone cancelled orders and idled capacity. Everyone was anticipating a deep and long recession until the fiscal/monetary bomb of March/April 2020. See #7 above. 2. The 120nm legacy nodes and similar are right at the center of the whole shortage. This has been underinvested for years because it has been low demand growth and low margin. Automakers are particularly vulnerable, because for years, every new feature has gotten its own cheap microcontroller to run it. There are now dozens in new cars. 3. Graphics cards have been affected by crypto miners sucking up supply at any cost, and everyone not named “Apple” competing for TSM’s top end processes. 4. iPhones don't just come with Apple A-Series chips made on TSM’s top-end node, but a host of others, some made on legacy processes where the shortage is. Likely we are talking about some cheap analog power chips or something like that. Apple has decided to push as much supply chain problems to iPad as they can. 5. For the vast majority of what automakers want, 7nm is overkill. Once there are more high end SoCs running multiple systems including self/assisted-driving, that will come into play. But that is not where the shortage is concentrated. 6. Apple was Intel’s 4th biggest customer before they left, so it has had a small impact, but only at TSM at their top node. Samsung has picked up Qualcomm and AMD as a result. Crazy times in the semi world.
- csours 5y agoDisclosure: I work for GM, what follows is solely my own opinion and perception of reality. On #1 also bear in mind that the supply chain is deep and complicated. OEM (GM, Toyota, Tesla, Ford etc) orders a number of COMPONENT X that contains a chip from a Tier 1 supplier. Tier 1 supplier order subcomponents from other suppliers. (Continue this until you have built a very confusing interdependent supply web). At any level of this, anyone could have (and did) cancel their orders in 2020. As in OEMs cancelled some orders, Tier 1 suppliers cancelled some orders, Tier X suppliers cancelled some orders, etc.
- criticaltinker 5y agoAlso known as the “bullwhip effect”: https://en.m.wikipedia.org/wiki/Bullwhip_effect https://en.m.wikipedia.org/wiki/Bullwhip_effect
- ramses0 5y agoAnd: https://en.wikipedia.org/wiki/Beer_distribution_game https://en.wikipedia.org/wiki/Beer_distribution_game
- rossdavidh 5y agoI was very disappointed that the Beer distribution game, as described in the Wikipedia article anyway, is not a drinking game.
- yowlingcat 5y agoNot with that attitude it isn't!
- mey 5y agoHow else do we simulate shrinkage in the supply chain?
- 5y ago
- PragmaticPulp 5y agoI would add: Many chips were becoming difficult to source before the pandemic hit. The pandemic-related demand and supply shock only made it worse. Source: Spent many weeks fighting supply chain issues and leading redesigns in 2018-2019 due to the beginning of the chip shortage. I know the shortage is associated with the pandemic because that's when most people started hearing about it, but it was a growing problem even before COVID came along.
- TradingPlaces 5y agoCurious, what were you trying to source, and in what volumes?
- PragmaticPulp 5y agoEven common parts like certain voltage regulators. Volumes were 1-10 million annually.
- TradingPlaces 5y agoInteresting. Some complete speculation about what you were mixed up in… Demand in first half 2018 was super hot, and depleted inventories. Wholesalers and retailers built up inventories of finished goods in anticipation of The Greatest Christmas Ever. Manufacturers did not, and kept inventories thin. But demand fell off a cliff in the back half of 2018, and the The Greatest Christmas Ever was a dud. 2019 saw canceled orders and capacity shutting down quickly in the first half of the year. By the holiday season 2019, I was driving around the ports of LA and Long Beach seeing containers stacked high in warehouse lots, and overflowing car lots, some with 2018 model year cars. Anyway, 1-10m puts you in a weird pocket when things were moving so fast like that. In 2018, you are too big to fill the order, because bigger players are sucking all the air out of the room. In 2019, you are too small for them to turn capacity back on for. I’ve been following this stuff since the 1980s, and 2018-now is the weirdest semi market ever, with two sharp upcycles and a sharp downcycle sandwiched in between, all in the space of 4 years.
- roughly 5y ago> 3. Supply chains had also all gone to a JIT model to keep inventories lower. This was a huge source of efficiencies, but made them vulnerable to a demand shock. I think it's worth emphasizing this - all of the other issues you describe are correct, but what's allowing individual disruptions to turn into a global crisis is a lack of buffering between components of the individual systems. This is a known issue with JIT, and in some ways it's factored into the models - assuming one bad year in ten, 9 very good years can still be more profitable than 10 pretty good years - but it widens the possible set of outcomes and allows for these kinds of cascading failures, which makes it harder for one institution to model or plan around.
- rossdavidh 5y agoIt's also the sort of thing where if you're the first one using it, the costs of it are not nearly as large as when the whole economy is using it. Your buffer is, in effect, being stored at other people's factories. This is logically predictable, but was not in fact widely appreciated before the current problems, perhaps because this is the first shock to come after JIT was almost universally used.
- roughly 5y agoYeah, I think this is in part an outcropping of the Friedman/Chicago School notion of firms as purely self-interested - the notion that one can ignore the actions of the other actors in the space when planning one's own strategy is sort of silly on the face of it.
- fragmede 5y ago8b. Flooding in Malaysia where the factories are located. Some may attribute this to ordinary flooding, others may attribute it to global warming. https://techwireasia.com/2021/12/malaysian-floods-devastate-workers-disrupts-semiconductor-supply-chain/ https://techwireasia.com/2021/12/malaysian-floods-devastate-...
- Aeolun 5y agoCan confirm that this has had direct effect on car manufacturing in Asia.
- Cromation 5y agoMaybe its a stretch but I was doing research into North Korean hacks from APT38 and noticed that TSMC had been hit by WannaCry in mid/late 2018 shutting down some of their chip manufacturing facilities. Would it be possible to believe this snowballed into what we have today with a series of bad situations?
- nikrdc 5y agoRe (1): It looks like (consumer durables / consumer expenditures) returned to the level it was at prior to the late-2000s recession. Do you have any explanations for what happened from 2010 to 2020? Seems like 12-15% is a more "normal" level than the 10-11% we saw during the 2010s.
- TradingPlaces 5y agoVery good question and long discussion. But the short of it is that people favored experiences over things with their spare income. A trip to Disneyland instead of a new TV. Now Disney seems too dangerous for many, so they buy more TVs. This is the most dramatic shift in consumer preferences ever.
- hooande 5y agodo you have a link to a source or more discussion on this?
- finance_astroid 5y agoThis is a solid article, a bit old and less economically authoritative, but underscores what everyone has been seeing if you watch the economy (economic data lags, the best place to look is usually quarterly earnings reports and commentary i.e. transcripts) https://www.nytimes.com/2020/05/20/business/public-gathering-events-coronavirus.html https://www.nytimes.com/2020/05/20/business/public-gathering...
- sva_ 5y ago> 4. There are new sources of chip demand in EVs. I think there are also new sources of chip demands in other industries, such as perhaps companies utilizing ML having their own chip designs. But I'm not sure how much that plays into the issue.