The Wearables Sector’s Pandemic-Fueled Growth Provides a Barrier against the Global Chip Shortage

The on-going chip shortage has reduced the availability of electronic devices on the market, pushing demand higher, which has, therefore, led to higher prices. Even though big tech companies such as Apple and Samsung have felt the pressure from production delays, the response from most companies and institutions has been prompt enabling them to cope with supply chain disruption. Despite these circumstances, the wearables sector is projected to grow in the foreseeable future, and human-centric technologies will be adopted as a winning strategy in the high-tech world.

Supply chain disruption caused by the current pandemic, combined with the ongoing geopolitical tensions between the United States and China, has resulted in a global semiconductor shortage. Currently, chipsets in circulation are made from silicon wafers that generally have a diameter of 150-mm, 200-mm or 300-mm. The declining price of the silicon wafer during recent years, has discouraged manufacturers from investing in new capacity. Therefore, due to the absence of economies of scale and the difficulty of maintaining increased profit margins, the persistent shortage in 150/200-mm wafers has resulted in high risks related to demand and price fluctuation, putting most factories and tech companies in jeopardy. 

Additionally, the shortage problem has been exacerbated by a drought in Taiwan, a power outage in Texas, a slew of factory closures, and a significant fire at a Japanese semiconductor fab. As businesses are ready to be more productive, smarter, and greener, the demand for semiconductors is predicted to increase further in the long run. The Semiconductor Industry Association (SIA) reported that the worldwide sales of semiconductors were $44.5 billion in June 2021, an increase of 29.2 per cent from June 2020. However, the supply of chipsets is lagging 10 – 20 per cent behind demand, and a re-balancing could take nine to twelve months.

The telecommunications industry, like the automobile industry, is considerably vulnerable to semiconductor and other component shortages. Additionally, the increasing interest in 5G and the United States' decision to restrict the access to its IP and technology to Huawei has pushed TSMC, the world's first dedicated semiconductor foundry, to raise prices of its most advanced chips following the increasing demand for electronic products.

Currently, Apple, Samsung, Xiaomi and other mobile electronics companies are all affected by the chip shortage. Chipset company, Qualcomm is also currently facing several challenges, including the ongoing sanctions against Huawei, while Samsung, the company's largest customer, lost $3.7 billion in chips in February due to the extreme cold in Texas. However, it is unclear to what extent chip shortages will hamper Samsung's mobile device production and Samsung's chief executive, Koh Dong-Yun, has stated that a new Galaxy Note smartphone may not be released until 2022. Things are even more complicated for Xiaomi, a company that makes smartphones for budget-conscious customers with razor-thin margins. As a result, Xiaomi's president promised to reduce costs, but he acknowledged that it has a limit and that the cost will eventually be passed on to customers. Similarly, Apple is expecting the shortage to cause a delay in production, mostly affecting manufacture of its iPhones and iPads. However, and for a variety of reasons, the overall impact on the company is likely to be limited.

A consumer product area that may not be so adversely affected by the chipset shortage is the wearables sector. Demand for wearables is on the rise as evidenced by tech companies' desire to create separate and specialized divisions dedicated solely to smartwatches and other wearable devices. As a result, owing in no small part to the impact of the pandemic, smartwatches and fitness bands are gaining momentum like never before. Indeed, despite the chipset shortage, growth in sales of wearables has progressed and shipments are expected to grow 13% in 2021. Within the wearables market, smartwatches are to represent 29 per cent (85.5 million) of total shipments volume during the year, and they are projected to increase share to command 39 per cent of total wearables by 2026. According to ABI Research forecasts, the global market for wearables is expected to reach 543.83 million of units shipped and smartwatches to reach 209.88 million units by 2026.

In comparison with smartphones, tablets, smart accessories, and other wearables, the smartwatch sector currently represents only 2 per cent of this total volume. In light of this, smartwatches will not, arguably, be high on the priority list for vendors owing to the chip shortage in the short run, although this has to be balanced against the growing attention these device types are attracting. Indeed, the demand for wearables among highly connected consumers has fueled the market's growth, while the pandemic has made consumers more conscious about the constant tracking of their health and wellbeing.

Meanwhile, to cope with the current situation, it seems that Apple will use the same chipset – the S6/S7 SiP with 64-bit dual-core processor - used in the Watch 6 for the upcoming Watch 7 available in autumn 2021, even if it is claimed to be more power-efficient than before. Similarly, Qualcomm will launch its Snapdragon WEAR 5100, which will follow the previous WEAR 4100+, which is believed to be less competitive when compared to Samsung’s new Exynos W920, a new processor to power its Galaxy Watch 4 series. Samsung claims that its new chip is the first to be built on an advanced 5-nanometer extreme ultra-violet process node and includes an LTE modem. Also, Xiaomi has created its own SoC for wearables known as Huangshan 2 that is more efficient, reduces power consumption, and has a dedicated NPU engine for AI-related features included in the chip. 

There are different types of chips found in smartphones and wearables. The SoCs come in multiple tiers with the top tiers earmarked for high end smartphones, while the low tiers are used in wearables. Top SoCs are made using 5nm or 7nm process nodes, which are less affected by the chip shortage. Those mid-range and low tier chips that use more popular process nodes, such as 14, 20 and 32nm are the ones that are heavily affected right now.

Furthermore, the EU wants to increase its share of the global chip manufacturing market from 10 per cent to 20 per cent and has pledged $150 billion to help. Meanwhile, the United States has set aside $52 billion for domestic chip manufacturing. Additionally, while customer and distributor chipset inventories may not be fully replenished for another three to six months, according to SEMI (chip manufacturing equipment industry association), from the beginning of 2020 to the end of 2022, more than 40 companies will increase capacity by more than 750,000 wafers per month. The capacity of 200-mm facilities is expected to increase by 17 per cent by the end of 2024. Therefore, chip shortages will not necessarily bring doom and gloom to the wearables market in the long run, even though tech companies may struggle to get all the parts it needs to meet demand. On the flip side, creating more capacity through building other factories around different geographies will require time, heavy investments, well-trained workforce, and could end up in overstocking.

As the tracking and monitoring of the current pandemic requires considerable usage of technologies to collect and share data, the wearables sector is expected to play a significant role for tech companies’ growth in the foreseeable future due to its nature of high data gathering. As a result, human centric technologies have driven a winning strategy where the product takes over the platform, and that Apple has anticipated this with its Watch. Creating better products at the expense of compatibility, prioritizing performance and design, is something that tech businesses need to understand to continue being competitive in the market.

Additionally, the increasing importance of human centric technologies and the adoption of MEMS technology has emphasized the interest for the thin wafer market. Latest advancements in the wafer markets reported a particular preference of semiconductor manufacture for Silicon Carbide (SiC) known for its advantages of compact size, heat loss, and switching speed. Most importantly, SiC semiconductors are ideal for 5G due to their greater power of conductivity and better performance. Such an advancement is good news for the wearables market. Additionally, the use of SiPs (system in a package), as Apple among others are providing, allows for the incorporation of chips and other components within the same package to fit into a limited space, namely wearables and smartphones. Therefore, as semiconductor manufacturing is accelerating alongside advancements in packaging technologies, it is essential for OEMs to incorporate these new technologies such as SiPs to allow for different designs and form factors to be manufactured.