The chip shortage means Apple Inc.'s rivals are having trouble making enough phones to compete with the iPhone, a problem expected to persist through the holidays. It's also affecting wireless carriers, some of which are seeing delays in improving their networks, and it could even raise computer prices.
There isn't an across-the-board shortage of chips, but rather problems with certain components here and there. If just one of the 20 to 30 critical chips that go into a smart phone is unavailable, the whole production line screeches to a halt.
Sprint Nextel Corp., for instance, couldn't satisfy demand for HTC Corp.'s EVO 4G, the first phone to use a faster "4G" network, in parts of the country. Motorola Inc. said shortages of a wide range of chips, from memory to camera sensors to touch-screen controllers, are contributing to problems supplying enough of the new Droid X phones to Verizon Wireless. The carrier's online store reports a two-week wait for shipping orders.
The chips that go into smart phones compete for production capacity with other chips at the gigantic factories run by contract manufacturers such as Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp.
Makers of a vast array of electronics, from TVs to data center switches, also depend on the factories.
The chip-making industry had a tough start to 2009. February sales were only $14.2 billion, down 30 percent from the year before, according to the Semiconductor Industry Association.
Although sales sprang back later in the year, manufacturers were spooked and reined in investment in chip factories. Capital spending plunged 41 percent to $25.9 billion in 2009, after dropping 31 percent the year before, according to research firm Gartner Inc. Total chip production capacity shrank.
Factories are having trouble scaling up production fast enough. The chip factories, or "foundries," are running at 96 percent capacity, up from 56 percent at the depth of the recession, according to the SIA.
"The semiconductor guys are really continuing to operate on all cylinders," said Linley Gwennap, the president of research firm The Linley Group.
Gartner predicts worldwide investment in the chip industry zooming 84 percent this year to $47.5 billion. That forecast is up from March, when it looked for a 56 percent increase.
Though investment is recovering, it takes months to set up new production lines and upgrade existing ones. That's why executives see shortages lasting until next year. Gwennap also sees caution in the industry because the global economic recovery is starting to look quite tentative.
"Even where companies are facing shortages, they're saying 'Nah, I'm not sure I want to invest right now, because demand could turn down any minute.' That makes for a very difficult environment," he said.
Though consumers might have to wait for new phones, they're unlikely to notice price increases. Phone prices are heavily subsidized by carriers, and competition means it's likely someone in the supply chain will absorb higher chip prices.
However, research firm iSuppli warns that prices for PCs could rise this year because of short supplies of memory chips. The prices for these commodity chips are highly volatile.