The global chip shortage is beginning to hit the smartphone industry, leading to production challenges, delayed shipments, and ultimately price hikes.
The ongoing shortage on the supply side has already disrupted the manufacture of everything from automobiles to video game consoles to computer peripherals, and smartphones could be the next on the list.
Key reasons behind the worldwide chip shortage include:
- Supply-chain disruption due to the Covid-19 pandemic: The Covid-19 pandemic started disrupting chip production in the first half of 2020, as widespread restrictions across the world caused many chip manufacturers to halt production. The pandemic also forced millions of people to work from home, triggering an increase in demand for smartphones, laptops, and tablets and increasing the pressure on chip production.
- The trade war between the US and China: In 2020, the US government imposed restrictions on China’s biggest semiconductor manufacturer, SMIC, forcing US companies to buy from non-Chinese manufacturing plants, especially TSMC and Samsung. As a result, TSMC was overloaded with orders and struggled to meet demand.
- Unexpected weather events: Recent dramatic weather events have further affected chip production. In 2021, Taiwan experienced its worst drought for several years. Chip manufacturers require large amounts of water every day, so restrictions on tap water supply by the Taiwanese authorities put pressure on operations. In March 2021, Japanese company Renesas was severely hit by a fire at one of its chip plants in which 23 machines were damaged. It took the company three months to restore full production capacity. NXP Semiconductors and Samsung units in Texas were closed for weeks after winter storms hit them in February 2021.
Varied impact across vendors
The leading smartphone makers, including Apple and Samsung, have protected themselves from this crisis by stockpiling critical components. Prominent smartphone players reportedly keep parts for six months in advance, but now these stocks are approaching an end.
Apple has said that the chips affected by the shortages are older technology, but they are still needed as a supporting component in iPhones. For Apple, the impact of the chip shortage was limited in its fiscal third quarter but is expected to get worse in the fourth quarter, which runs from July to September. In addition, the launch of Samsung’s latest mid-range smartphones, like the Galaxy A52 and Galaxy A72, has been delayed due to the chip shortage.
The chip shortage has impacted vendors in a variety of ways. For example, Google announced in August 2021 that its new Pixel 5a 5G smartphones would only be available in the US and Japan due to what it described as “global supply chain challenges.” Xiaomi has increased the price for some of its models sold in India (including the Redmi Note 10) as the price of components has increased. There was also a delay in the shipment of its Mi 11 Ultra smartphone in India predominantly because of supply chain issues.
Shortage means smartphones will become more expensive
The shortage is causing an increase in the price of critical components. Smartphone companies can either absorb it themselves or pass it to their customers. Reportedly, chip manufacturers have increased their prices by up to 20%, depending upon the type of product.
Chinese vendors like Xiaomi have already increased their product prices, and it is expected that Apple and Samsung will follow suit for their upcoming smartphone models. This could lead price-sensitive customers to either switch to cheaper brands or choose not to upgrade their phones.