Chip shortage to hit TV and smartphone OLED displays

If the picture on the screen of your new iPhone seems sharper, you have not been dazzled by Apple’s slick marketing. Next-generation displays are features of the latest 5G iPhones and Samsung Galaxy smartphones. But they are next in line to fall victim to the effects of the global chip shortage.

Device makers have good reason to shift away from liquid crystal displays. Screens using organic LED (OLED) technology are thinner, boast sharper colours, higher resolution and lower energy needs. They can even be folded. Nearly one in two smartphones and most high-end TVs use these displays.

The improvement is thanks to at least 100m dots, or pixels, in every screen. On LCD screens, a single background light source is used to illuminate the entire screen. On an OLED screen each dot lights up independently, giving pictures more definition.

Given the advanced way the new displays operate, they need specialised chips to power them. Until 2018, Samsung Galaxy phones were the only ones using these displays. As a result, 90 per cent of the world’s OLED chips are made in South Korea, most by Samsung. Taiwan Semiconductor Manufacturing Company joined later and now accounts for the remaining share.

These two companies are now overwhelmed. Samsung and TSMC are the same chipmakers that the world’s automakers, server makers and smartphone makers rely on to make the advanced chipsets that serve as the “brain” of their products.

A shortage of these products has intensified as demand reached a record this year, with sales by volume reaching 100bn chips in April. Capacity at Samsung and TSMC remains strained, with the latter in a drive to increase automotive chip production by 60 per cent.

“The shortage is not just about high-end chips anymore,” said CW Chung, head of research at Nomura in Seoul. “The shortfall now affects chips of all sizes and levels of sophistication, including chips critical for OLED display production.”

Making OLED display chips has always been an awkward business. The manufacturing process is complex enough that just a handful of companies can produce them, but it is not advanced enough to support high margins. Operating margins on display chips are less than a third of those for more advanced chipsets, which run well over 30 per cent.

Display chips must be customised for each company and model, which use unique screen configurations. Mass production is therefore difficult.

Another problem is that they are bigger. Chips — whether they are advanced enough to power self-driving cars or simply tell your toaster when the toast is done — are made from the same round silicon wafer, cut up into tiny parts. The smaller the chip, the more you can get from one wafer panel.

Meanwhile, prices of chip-related components have risen 15 per cent this year. That growing input cost has already started shifting to the consumer. Companies such as HP, which has raised prices of its PCs by as much as 14 per cent to reflect higher component prices, have warned of further increases.

“The input factors of all chips, from raw materials like silicon and metals to electricity usage, are largely the same — whether the end-product is an advanced chipset or a simple processor,” said Chung.

This means chipmaker capacity allocation is likely to become ever more dominated by industries that order large volumes of pricey chips. Display makers are not one of them. To avoid a hit to their margins, manufacturers may have to cut down their display output.

For smartphone makers, there is little room for manoeuvre. OLED screens are already one of the most expensive components of a smartphone. The display of the Samsung Galaxy Note 20 Ultra model costs $92 and the iPhone 12 Pro at about $70 per unit, more than the $57 required for a main processing chip and the $60 for its camera. Hardware profit margin declines at Apple in 2018 have coincided with the adoption of OLED screens for some of its models.

Tell-tale signs of a looming shortage of OLED chips, similar to the one experienced by the broader chip market last year ahead of a global shortage, are already starting to show. Prices rose by a fifth in the second quarter, adding to a similar increase in the previous quarter. Companies are stockpiling.

Yet the incentive for Samsung and TSMC to allocate precious capacity to these lower-margin display chips continues to fall. Pricier displays are set to further accelerate price inflation in consumer electronics. They are just the latest example of what happens when the delicate balance that holds together the chip industry is upset.

june.yoon@ft.com