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Still hungry for chips?

Megan Robinson
December 21, 2021

Chipset shortages have continued to impact the industry throughout 2021, contributing to year-on- year declines in shipments in Q3 – and analysts predict only gradual improvements until late 2022

Chip shortages have presented an ongoing problem for the industry throughout 2021. These have been due to the pandemic, excess demand, and factory shutdowns caused by COVID-19 and even extreme weather conditions in some places.

Different sectors have been affected, with the smartphone industry one of the last to be hit.

Major smartphone vendors, including Apple, Samsung and Oppo, have felt the impact as they have suffered supply-chain shortages and delayed launches.

And component shortages have contributed to smartphone shipments falling 6.7 per cent year-on-year in the third quarter, worse than IDC’s previously predicted decline of 2.9 per cent.

Compounding the challenge, IDC senior research manager Marta Pinto believes demand has also been greater than expected due to adoption of connected devices, the widespread move to 5G and innovation on all technologies.

“Manufacturers are now going to struggle to deliver enough volumes for orders, and distributors will be running short inventories to try and meet demand,” she says.

One possible outcome of the situation, says Pinto, is increased cross-channel and cross-border commerce as both distributors and channels bid to fulfil this demand to keep customers engaged and monetise their investments in devices, logistics and operational improvements.

Price rises

Counterpoint’s VP and research manager Peter Richardson adds to this by discussing how the price of components has risen.

He says that some vendors may be able to absorb some of these extra costs, but that people should not be surprised if prices remain higher than they might otherwise have expected, or even rise in some cases.

To compound that, Richardson adds that other things like transportation have become dramatically more costly too.

Pinto says smartphone shipments have been further affected by added strain on supply chains, additional lockdowns in countries in Southeast Asia, work restrictions and a slower manufacturing process.

The struggles counteract the progress of advanced economies and recovery from the pandemic-related recession, factors that meant many analysts had predicted a much better Q3, according to CCS Insight VP Marina Koytcheva.

“We estimate that 320 million smartphones were shipped in 3Q21, down 7.5 per cent from 3Q20,” she said.

“What is more, until a few months ago the negative effect of the chipset shortage was seen mostly in the older products and in the lower price tiers. “The expectation that premium smartphone makers with strong buying power would be sheltered from the shortage turned out to be optimistic, and the fact that even Apple has been affected shows how profound the supply shortages are.”

Richardson adds that in this situation, smartphone vendors are now focusing on products that drive revenue rather than volumes.

“Some are switching components from other product categories – for example, Apple diverting components from iPad to iPhone,” he says.

“More broadly, the Chinese market remains tepid, with consumer demand reflecting ongoing pandemic concerns and weaker economic conditions in the country.”

And with big names like Samsung and Xiaomi seeing a decline in units shipped – by 14 per cent and five per cent respectively year-on-year in the third quarter – can they bounce back to pre-pandemic levels?

Richardson says both brands are structurally fine and expects them to recover, while Koytcheva says an ageing phone base and demand for replacements held back by short supply “will be unleashed once product availability in lower price tiers improves.”

Pinto adds: “The short-term industry situation does not mean a long-term impact on these companies’ strategies. The main issue is who will be able to endure the added stress?” She says that with additional financial commitments to be taken – such as for component sourcing, transportation, marketing and channel sponsorship – only those with enough financial depth will be able to thrive.

Pinto believes that Samsung has enough diversity in its business segments to cope with flat growth or losses to an extent, whereas Xiaomi is a relatively new vendor and will have to rely on investors remaining firm.

Meanwhile, Richardson does not expect the crisis to improve much over winter.

“The demand-supply situation is not yet balanced and is unlikely to become so for several quarters,” he says.

Happy holiday? 

The holiday season is usually a great time for manufacturers, retailers and vendors, but they may have to wait before seeing a resurgence in growth amid the shortages and the ongoing pandemic.

And Pinto warns: “Investors should be cautious about how much capacity they are creating today to respond to an abnormal demand, as if there is overcapacity in the future that will drive prices down, damaging their return on investment.”

Analysts think the situation will eventually start to get better, even though we will only see gradual improvements from now until late 2022 and growth is unlikely to return to pre-pandemic levels at that point.

And Koytcheva at CCS Insight also sees some light at the end of the tunnel if the vaccination regime remains effective in reducing the spread of COVID-19, allowing continued production through factors such as factories staying open.

“How the COVID-19 situation will develop during the winter remains a risk,” she says. “But high levels of vaccination in countries – key to production of mobile phones – brings optimism that we are in a much better position compared to last winter.”

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