Shipments are slowing and prices are rising as companies hunt for parts; supply-chain wait times enter the danger zone

By Jiyoung Sohn July 19, 2021 7:52 am ET

SEOUL—The smartphone industry is showing battle scars from the world-wide chip crunch.

Shipments are slowing and customers are seeing their first significant price increases in years. Some companies have had to scale back production and delay new releases. All this has halted what had been a strong start to the year.

Smartphone makers, for much of the year, avoided the parts disruptions faced in the auto, personal computer and home-appliance industries. Phone manufacturers purchase key parts roughly a half a year in advance, but now those stockpiles have shrunk.

For Samsung Electronics Co. , the world’s largest smartphone maker, problems sourcing key parts contributed to an expected 20% drop in shipments from the previous quarter. Alphabet Inc.’s Google said its Pixel 5a 5G device would be available only in the U.S. and Japan, after the prior year’s models were released more widely.

In March, China’s Xiaomi Corp. unveiled its latest flagship device in India called the Redmi Note 10, at a price of roughly $161. But as of this month, the phone retails at $174, about 8% higher than the original price. Xiaomi also launched the Mi 11 Ultra in India in April, but sales were delayed and it was only earlier this month that the phone became available for purchase.

“Many industries in the world have been affected by the chipset shortage,” a Xiaomi spokesman said.

The chip supply struggles aren’t distributed evenly across the smartphone industry. Apple Inc., which accounts for about a sixth of the 1.3 billion smartphones sold annually, has stayed out of trouble given its supply-chain clout, according to industry analysts, as have most of Samsung’s premium devices. But that still leaves more than 80% of the smartphone industry reeling for parts.

Chips Are Difficult to Make, Even Harder During a Supply Crunch
A global chip shortage is affecting how quickly we can drive a car off the lot or buy a new laptop. WSJ visits a fabrication plant in Singapore to see the complex process of chip making and how one manufacturer is trying to overcome the shortage.
Photo: Edwin Cheng for The Wall Street Journal

Global smartphone shipments for the first three months of 2021 soared 20% from a year earlier and were 4% higher than the comparable period in 2019, according to market researcher Counterpoint Research.

The industry appeared primed for a strong 2021 as Covid-19 vaccines rolled out, economies reopened and people started spending again. Global smartphone shipments had bottomed out last year during the April-to-June quarter as countries locked down. And historically, second quarter shipments have bested first-quarter figures.

This year looks to be an exception, despite the high hopes. Industrywide shipments are expected to drop by 10% in the second quarter from the first, Counterpoint estimates.

Meanwhile, smartphone unit sales for the rest of the year also look relatively flat compared with 2019 and 2020. Counterpoint Research projects global smartphone shipments in the second half of this year will total about 771 million units, up 1.3% from the 761 million units shipped a year earlier. The parts shortages held back what could have been bigger gains in the second half, said Tarun Pathak, a research director at Counterpoint.

Higher component prices brought on by the chip shortages are getting passed through for now by raising device prices. The average wholesale price for phones world-wide went up 5% in the April-to-June quarter, according to market researcher Strategy Analytics. That is a break from recent years when prices didn’t increase by more than 2%.

The phone industry’s pricing power should protect, if not bolster, companies’ bottom lines, and buyers may not push back against the higher costs if they are eyeing new devices that can connect to next-generation 5G networks, said Neil Mawston, executive director at Strategy Analytics.

“Consumers almost expect higher prices,” Mr. Mawston said.

Much of the phone industry is struggling to procure a variety of semiconductors, industry analysts say, with pronounced struggles in sourcing power-management chips, display drivers, application processors, in addition to 4G and 5G chipsets.

As of June, the average lead time for semiconductors stood at 19 weeks, longer than 16 weeks, which is considered a supply-chain danger zone, said Duksan Jang, a research associate at Susquehanna Financial Group. A healthy lead time is considered to be between 12 to 14 weeks.

The supply crunch was made apparent recently in second-quarter earnings results from Taiwan Semiconductor Manufacturing Co. , the world’s largest contract chip maker. TSMC’s total sales rose 20% from a year earlier. But the company’s revenue from smartphone chips declined by 3%.

In the case of Samsung, the South Korean tech giant reported roughly 77 million smartphone shipments in the first quarter, beating market forecasts. But by then, Koh Dong-jin, the company’s mobile chief, had warned that a chip shortage would hurt its business in the April-to-June quarter.

Sanjeev Rana, a Seoul-based senior analyst at brokerage CLSA, initially forecast Samsung would ship about 65 million phones in the second quarter. But he now projects the company missed that mark by 7 million units—with about half of that attributable to component shortages.

“We are closely monitoring the industrywide challenges, and making our best effort to minimize impact on our business,” a Samsung spokeswoman said.

Across the industry, phone makers have also had to deal with continuing Covid-19 outbreaks that not only curbed consumer spending but also affected production in key production hubs in India and Vietnam.

Those delays, combined with the chip shortage, have affected the total number of new phone releases: About 310 phones were launched in the first half of 2021, an 18% drop from 370 devices a year earlier, according to Counterpoint Research.

Any delays are unlikely to affect the U.S., the world’s most profitable smartphone market, though they could reach less-affluent markets and lower-end phones, said Cliff Maldonado, principal analyst at Baystreet Research LLC, which primarily tracks smartphone sales in the U.S.

“If you have limited chips, where will you put them? The ones that give you the most profit,” he said.

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Appeared in the July 20, 2021, print edition as ‘Chip Shortage Hits Smartphone Makers.’