How the Semiconductor Shortage Impacts the Data Center

The semiconductor shortage has impacted huge swathes of the global supply chain. So, when the chips are down, what does the data center do?

Since the onset of the pandemic, the world has been struggling with a shortage in semiconductor chips. Unsurprisingly, this poses a real problem for the tech industry in the form of stockouts and snarled supply chains. 

Despite this, much of our digital experience seems blissfully unaffected by the chip shortage. Commercial operations still run and the world continues to move inexorably online.  So, what’s actually been the impact of the shortage on the enterprise and hyperscale data centers that support so much of today’s digital infrastructure?

Identifying Primary Causes 

Shortages can have all sorts of causes. These range from scarcity of raw materials, to difficulties with the manufacturing process, to obstructed supply lines. With the chip shortage, it’s a mix of all of the above. 

Don’t confuse the chip shortage with concerns about the long-term supply of chip-grade silicon. Research suggests supplies will, by 2040, be far exceeded by global memory demand. That’s a separate (and very real) challenge for the storage industry, and will take some extra special innovation to solve. 

1. COVID-19

One contributing cause is COVID-19’s continuing impact. The pandemic spiked demand for consumer electronics, especially computers, televisions and automobiles. 

While demand soared, the pandemic was also wreaking havoc on shipping, leading to increased lead times. Lockdowns also led to shutdowns in key factories for manufacturing and testing. Countries such as Malaysia, Thailand, and especially Taiwan, where TSMC has cornered 54% of the global foundry market, experienced difficulties. 

2. International Tensions

There’s much more than the pandemic at play in the chip shortage. Geopolitics is a key contributor, and the protracted tensions between China and the United States haven’t helped.

While the most important players in the global foundry market, judged by market share, are Korea (Samsung) and Taiwan (TSMC, UMC, and others), China remains a significant player. 

As of today, Chinese firms account for 7% of the semiconductor market, and 5% of that is China’s Semiconductor Manufacturing International Corporation (SMIC). The very same SMIC that was sanctioned by the U.S. government in late 2020, citing the risk of military use.  

Additionally, the first wave of U.S. imposed tariffs on Chinese goods in 2018 targeted raw materials needed for wafer production. 

It’s shocking how interconnected the world has become. For instance, Ukraine produces 90% of the world’s semiconductor grade neon. Even a drought in Taiwan can affect chip production: TSMC uses huge amounts of ultrapure water during the manufacturing process.

3. Barriers to Entry

Another factor preventing a quick fix is that the chip manufacturing industry has high barriers to entry. New semiconductor foundries take a great deal of money and time to set up. We’re talking an upfront investment of at least $10 billion, and usually at least three years to become operational. 

Meanwhile, prices have risen sharply. The auto industry has possibly seen the most direct impact, with prices increasing 8% in 12 months following July 2020. Other affected products include everything from medical devices (think pacemakers and ultrasound equipment) to televisions. Some high-end TVs have experienced price increases of 30%. 

Assessing the Data Center Impact 

But what does this all mean for data centers? Here’s the good news. While the chip shortage isn’t doing them anyone any favors, data centers are less affected than other areas of tech. 

The experts agree. In a roundtable discussion among data center executives this past fall, the consensus was clear: while the chip shortage is something to keep an eye on, it isn’t as significant a challenge as the continued labor shortage across DCs or the pandemic’s impact on transportation.

Data centers have fared relatively well for several reasons: 

• Their growing status as essential infrastructure, meaning they tend to take priority in the supply chain. 
• It’s just good business sense for chip manufacturers to sell to data centers, as they’re a more reliable source of sales, and experiencing continued growth to boot. 
• When it comes to large companies, there’s purchasing power to consider. Deep pockets mean big tech can jump to the head of the line, with consumer channels more prone to immediate disruption. 

This isn’t to say things can’t get more difficult if shortages continue. If it gets worse, it could lead to higher prices or extended lead times. 

In particular, supplies of data center switches may be affected. For instance, research by the Dell’Oro Group reported stockpiling behavior on behalf of cloud service providers, as firms became concerned. However, production of high-performance high-throughput core switches is less susceptible to disruption.

Other data center infrastructure which might be impacted include PDUs (Power Distribution Units), ATS (Automatic Transfer Switch) units, and generators. During the pandemic, supplies of silicon wafer for server CPUs haven’t generally been an issue for data centers, though the outlook remains unclear on exactly how long the supply chain shortage will drag on.

A Shifting Outlook

It may also be that data centers have gotten lucky, with the chip shortage arriving at a time of transition for traditional IT. 

One consequence of the pandemic is that a majority of local data centers are planning to reduce capacity. This is a long-standing trend, accelerated by the lurch to remote work, as more work takes place in the cloud.  

It’s not that tech spending is slowing down though. Gartner projects that firms will lay out a stunning $4.4 trillion on IT this year. But an increased proportion of spending will be on services and third-party expertise, in the form of tech consultants helping organizations get more out of cloud operations. That’s money which won’t be spent on proprietary hardware. 

In other words, small data centers are downsizing, while hyperscalers can afford to spend what it takes to meet their supply needs. And it may also be that organizations will remain preoccupied for some time yet acquiring even older tech for their facilities. Step forward Homo Sapiens. Hiring skilled labor into the data center remains a long standing challenge.

The World Turned Upside Down

There’s also the fact that the extraordinary experience of the coronavirus pandemic forced companies and governments everywhere to drastically rethink their approach to tech offshoring.  

Take Intel, which in the past year or so has become something of the poster child of the repatriation movement—and stands as a massive beneficiary of the U.S. CHIPS Act slowly passing through Congress. Under CEO Pat Gelsinger, Intel is also one of the firms most aggressively asserting control over the chip manufacturing process. In February it purchased Tower Semiconductor, an Israeli foundry which manufactures two million chips per year. This acquisition is good for Intel Foundry Services, a $1 billion fund to support disruptive technologies in the foundry ecosystem. 

In a further sign of just how strange things have become lately, Nvidia CEO Jensen Huang recently said he would consider using Intel Foundry to manufacture Nvidia chips. This was surprising to many, since Intel and NVidia are in fierce competition in the GPU market. Unusual times make strange bedfellows.

Of course, where these high-profile business relationships ultimately end up is anyone’s guess. However, any move toward greater cooperation in advanced tech manufacturing would likely have positive upsides for data centers. Increased collaboration tends to shore up supply chains, reduce shortages, and can drive down prices. 

Onward and Upward

The semiconductor shortage is a real issue, with effects every bit as complex as its causes. But markets are, by their nature, complicated, and negative impacts don’t fall equally on all sectors. As it is, larger-scale data centers are unlikely to be as inconvenienced as other areas while chip manufacturing remains under pressure. 

Besides, data center operators have much to be optimistic about. The modern data center stands as the lynchpin of a world that continues to digitize at breakneck speed. By anyone’s measure, that’s an enviable position to be in.

From remarketing to procurement, get in touch with Horizon Technology for all your data center hardware needs.