Is the Chip Shortage Over?

Back in April of 2022, I wrote about The Chip Shortage and how lead times for many products such as routers and switches were delayed by almost a year. Car prices are still at an all time high with the average new car payment being $667/month with used cars costing around $515/month. $515/month for a used car was the pre-pandemic average for a NEW car payment.  The globally inflated prices for many goods (especially cars) boils down to the chip shortages – so when can we expect the shortage to end?Is the Chip Shortage Over?

The answer is both yes and no. It really depends on what segment and industry you’re asking about. On the west coast, we are starting to see a decline in car prices because demand is starting to drop, but on the east coast we are not afforded this luxury. 

If you’re in the market for a brand name switch, router or AP, our customers are citing delays of 9 months to a year at the time of writing but other network vendors may be able to deliver much sooner.

How are New Chips Being Released?

If you follow the hardware scene, AMD just announced Ryzen 7000 CPUs and RX 6000 Series Graphics Cards. Intel just announced their 13th Generation CPUs and NVidia is launching RTX 4xxx in October. The curious among you are asking, how on earth can these companies release new chips during a shortage like this? Well, there are two answers to this question.

The first answer is, these chips have been in development probably since before or shortly after the chipshortage happened. There was production and contracts in place already for these chips that must be fulfilled. And companies like TSMC are running at full capacity, possibly above that so they are pumping out chips extremely fast.

The other reason which we will expand upon below is understanding we are not short on chips really, we are short on the labor capacity to install chips onto boards and into different types of products.

Chip Integration is the Bottleneck

The reason for the shortages is because of infrastructure and resources, not because of the lack of chips being produced. This is why you can buy a current generation Intel/AMD CPU or AMD/NVidia graphics card at MSRP anywhere today, but it takes nearly a year to get a switch/router from the largest name brands.

There are many departments and logistics involved with making a router or switch. You need the chip, the housing, the board, and many elements within the device for it to be completed. But a router/switch company typically does more than just manufacture devices. They often have a complex software department and are involved in many verticals.

A good example of this is EVGA, one of the most sought after companies who made NVidia Graphics cards.They recently ended their relationship with NVidia, but it was revealed that EVGA has 280 employees. Of those 280 employees, a good chunk (probably at least 30-40%) were dedicated to building graphics cards. Sure they need to source memory chips and PCBs, but those are still readily available to get. And NVidia ships the chips themselves to their board partners.

When you look at networking vendors, a significantly smaller portion of their company is dedicated to putting chips on boards and building devices. Coupled with logistical issues of some of the parts needed for these devices, they cannot catch up especially due to the demand.

Simplicity is Key

To expand upon the issue (or lack thereof in certain segments), simplicity is key. For AMD and Intel to ship a processor, they take the chip from TSMC (for AMD) or In-house (for Intel), package it and send it to retailers. AMD does not even include stock coolers with most of their newer chips. Graphic card manufacturers have a few more steps that are required, and some of them (like Gigabyte and Asus) make far more devices than just graphics cards. However, hardware is their primary source of gross revenue and like EVGA, their highest grossing segment (albeit smaller margins) are graphics cards. 

But also consider that many of the parts that they manufacture have some crossover material as well. Motherboards and power supplies use PCBs, they need capacitors for most of their product and plastic & build material is used throughout their lineup.

These companies just have far more resources to put chips on a board compared to most networking vendors, car manufacturers, etc. Even laptops are readily available because motherboard manufacturers often install the CPUs on the boards before they ship them to Dell, HP, Lenovo, etc. Those companies as mentioned above have significantly more resources allocated to placing chips onto boards than the other types of companies.

What Happens when the Chip Shortage Ends?

Well, we have some experience with this already. Back in April I sold a graphics card that had a suggested MSRP of $380 to a family member. I paid $600 for it back around Christmas but had never used it. I looked at the market and thought $500 was fair, slightly below current prices. Within 4 weeks, the shortages in that graphics card segment cleared up and that same card was being sold for $350 brand new on retailer sites.

It happened quickly and I think large companies that are experiencing shortages, such as networking vendors and car manufacturers know this fast rebound is very possible. Due to lead times, they are concerned that if the market corrects itself quickly, they could be sitting on significant inventory and be forced to take big losses. Dealerships could be flooded with cars unable to sell and have to take losses. Networking vendors may fill warehouses with inventory waiting to be sold at markdowns below costs.

Retailers got hit hard because they were forced to liquidate cards below what they paid. Granted, they were making pretty steep margins for quite some time. As evidence that companies like EVGA often did sales of cards at MSRP even during the shortage, you just got on a list for the card you wanted.

Protection from Inventory Concerns is Extending the Shortages

It’s no secret that companies are being careful with producing products. Companies could manufacture more devices however they want to avoid taking huge losses if the market has a sudden correction. The problem is, the market can and will correct itself far quicker than production timelines. Many of these orders are placed months if not quarters in advance, and companies cannot cancel these orders or make modifications. 

Is the End Truly Upon Us?

I stand by my original statement of ‘yes and no’.. Supply chain issues are still impacting some areas of production. Sure, making silicon chips overseas, shipping them to AMD/Intel then packaging it for retailers is far less problematic. But when products require the sourcing of many types of material, especially when requiring specialized materials, all it takes is one or 2 required elements to be delayed or backordered and the shortages will continue.

But as demand drops in certain sectors (like automobiles), that will help equalize supply chain issues. As the demand drops for more and more products, resources can be reallocated to more troubled sectors. Companies are offering additional benefits and pay for specific roles which will help the market catch up as well.

Impact on NetBeez

As we have pivoted through COVID-19, so have many of our new and existing customers. Customers are leveraging virtual deployments, remote worker, cloud monitoring and putting less emphasis on physical hardware. We’ve been lucky that, while some of our components have increased in prices for physical agents, they have still been accessible allowing us to deliver product refreshes and new customer deployments in a very reasonable time frame. 

And truthfully, many of our customers’ needs and use cases have changed. While remote office monitoring is still important, it is not the only area they need help with. Remote worker and hybrid cloud monitoring have been the two largest areas of growth for us. There are now multiple points of entry into a network that our customers need help with and thankfully, us buying chips is not a requirement for the majority of use cases.

Conclusion

Although the chip shortage is still happening, we will continue to see segments and geographic areas start to return to a more stable market. It still pains me to see that customers are having to wait 6 months to a year to get a network switch. I understand the frustration knowing that companies could amp up production to help settle the demand but at the same time, if a company is reckless and not strategic, we don’t want them to mis-forecast and end up laying off large segments of their workforce. Hopefully we’ve learned a lesson from the chip shortage and can better plan for future shortages.