When Uptime Institute Intelligence surveyed data center infrastructure operators about supply chain issues in August 2021, more than two-thirds of respondents had experienced some shortages in the previous 18 months. Larger operations bore the brunt of disruptions, largely due to shortages or delays in sourcing major electrical equipment (such as switchgear, engine generators and uninterruptible power supplies) and cooling equipment. Smaller technical organizations more commonly saw issues around getting IT hardware on time, rather than mechanical or power systems.
A shared gating factor across the board was the scarcity of some key integrated circuits, particularly embedded controllers (including microprocessors and field-programmable gate arrays, or FPGAs) and power electronics of all sizes. These components are omnipresent in data center equipment.
On balance, respondents expected shortages to gradually ease but persist for the next two to three years.
Demand is weakening
There are now signs that supply chains, at least in some areas, may regain balance sooner than had been expected. However, this is not because of sudden improvements in supply. True, manufacturers and logistics companies have been working for more than two years now to overcome supply issues — and with some success. The semiconductor industry, for example, committed billions of dollars in additional capital expenditure, not only to meet seemingly insatiable demand but also in response to geopolitical concerns in the US, Europe and Japan about exposure to IT supply chain concentration in and around China.
Instead, the reason for the expected improvement in supply is less positive: unforeseen weaknesses in demand are helping to alleviate shortages. Some major chipmakers, including Intel, Samsung Electronics and Micron, are expecting a soft second half to 2022, with worsening visibility. The world’s largest contract chipmaker TSMC (Taiwan Semiconductor Manufacturing Company) also warned of a build-up of inventories with its customers.
There are multiple reasons for this fall in demand, including:
- Concerns about runaway energy prices, and the availability of natural gas in Europe, due to Russia’s geopolitical weaponization of its energy exports has contributed to renewed economic uncertainty — forcing businesses to preserve cash rather than spend it.
- Market research firms and manufacturers agree that consumers are spending less on personal computers and smartphones (following a post-Covid high) resulting from cost of living pressures.
- China played a part in making a bad situation worse for vendors earlier in 2022. By enforcing its zero-tolerance Covid-19 policy, resultant severe lockdowns markedly reduced domestic demand for semiconductors — even as it dislocated supply of other components.
All of this means production capacity and components can be freed up to meet demand elsewhere. A slowdown in demand for electronics should help availability of many types of products. Even though components made for consumer electronics are not necessarily suitable for other end products, the easing of shipments in those categories will help upstream suppliers reallocate capacity to meet a backlog of orders for other products.
More power components on the way
Chipmakers that operated at capacity will shift some of their wafers and electronics manufacturers will refocus their production and logistics on matching demand for power components needed elsewhere, including data center equipment and IT hardware. Supply chains in China, reeling from a prolonged lockdown in Shanghai, are also recovering and this should help equipment vendors close gaps in their component inventories.
In any case, the availability of key raw materials, substrates and components for the production of chips, circuit boards and complete systems is about to improve — if it hasn’t already. It will, however, take months for a rebalancing of supply and demand to propagate through supply chains to reach end products, and it will probably not be enough to reverse recent, shortage-induced price increases. These price increases are also due to rising energy and commodity input costs but lead times for IT hardware and data center equipment products (barring any further shocks) should see an improvement in the short term.
Even if supply-demand reaches a balance relatively soon, the long-term outlook is murkier. The outlines of greater risks take shape as the world enters a period of increased geopolitical uncertainty. In light of this, the US, Europe, China and other governments are pouring tens of billions to re-structure supply chains for increased regional resilience. How effective this will be remains to be seen.