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Will AI Chip Supply Dry Up and Turn Your Project Into a Costly Monster?
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Shane Snider, Senior Writer, InformationWeekFebruary 12, 20256 Min ReadTithi Luadthong via Alamy StockWith companies racing to add generative AI (GenAI) capabilities to their business arsenal, ammo may be running low as AI chip demand is on pace to outpace supply -- a concern that may have IT leaders looking for creative solutions in the coming years.Nvidia has become the darling of AI, with its powerful graphics processing units (GPUs) multiplying in data centers around the world. The companys popular wares dont come cheap. Its latest Blackwell GPU fetches more than $40,000 per unit, while its last generation Hopper H100s commands a respectable $30,000. AMD, which produces the cheaper MI300X GPU between $10,000 and $15,000, expects data center demand for its AI chips segment to drive big revenue growth.A report from Bain & Company said businesses should expect a likely AI chip shortage, with AI driving demand for components by 30% or more by 2026. A demand increase of 20% or more would be enough to put a damper on the AI chip supply chain. And its not just data center GPUs facing a crunch -- demand for AI-enabled mobile devices and PCs will spur upgrades in the coming months and years.As the technology sector learned in the days of the pandemic, the chip supply chain is fragile. COVID-19 drove a huge increase in sales of PCs to handle remote work needs, but supply chain shortages created a bottleneck.Related:The semiconductor supply chain is incredibly complex, and a demand increase of about 20% or more has a high likelihood of upsetting the equilibrium and causing a chip shortage, the report stated. The AI explosion across the confluence of the large end markets could easily surpass that threshold, creating vulnerable chokepoints throughout the supply chain.If demand projections hold at the current trajectory, key components for semiconductors would need to almost triple production capacity by 2026, the report says.In a live interview with InformationWeek, Anne Hoecker, global head technology, media and telecom with Bain & Company and one of the reports authors, says while demand is currently high, supply is plentiful -- for now. As we look at it there are probably a few things that could drive a chip shortage, she says, noting rapid developments in the AI space over the last couple of years.What would really drive capacity tightness is if theres the killer AI app that everyone is still kind of waiting for -- something that really makes AI PCs take off, or an upgrade on your phone cycle. That would drive a lot of demand for a lot of different types of semiconductors across different notes that could really drive tightness across the board on supply chains, she says.Related:Joseph Hudicka, a supply chain expert and adjunct professor at Rider University, says such a chip shortage would drive AI project costs higher. Basic laws of economics reflect that high demand and low supply increases prices and continues to increase those prices until a market reaches the other side of the bullwhip when supply again outpaces demand, he tells InformationWeek in an email interview. This phenomenon naturally presses project costs to exceed budgets.Supply Chain ConstraintsAmerican companies like AMD and Nvidia count on Taiwan Semiconductor Manufacturing Company (TSMC) to manufacture their chips. So far, the company has helped the US maintain a competitive lead in AI chip production over China. Efforts to diversify the semiconductor supply chain are underway, with TSMC planning to ramp up production at a new production facility in Arizona. Intel and Samsung are also ramping up their manufacturing efforts in the US -- with the help of the $52.7 billion CHIPS Act.But those projects are still years from coming online.TSMC has been building in Arizona for several years now, and even when they are able to bring up their capacity, its still going to be a small portion of what they produce in Taiwan. This is something thats going to take decades, Bain & Companys Hoecker says.Related:And while we havent reached the point of a shortage, TSMC is racing to keep up with spiking demand."I tried to reach the supply and demand balance, but I cannot today, TSMC CEO C.C. Wei said in an earnings call in July. "The demand is so high, I had to work very hard to meet my customer's demand. We continue to increase."Wei said AI chip inventories "continue to be very tight all the way through probably 2025 and hopefully can be eased in 2026.""We're working very hard, as I said, wherever we can, whenever we can, he said. All my customers ... are looking for leading-edge as a capacity for the next few years, and we are working with them.And TSMC is particularly vulnerable because of the countrys contentious relationship with China, which continually threatens military intervention. A military conflict could have a disastrous impact on the semiconductor supply chain. If something big were to happen there, the impact would be massive, Hoecker says. Thats why a lot of companies are pushing TSMC to diversify.Hudicka agrees. Expect to see ever-increasing investments in chip production in other markets like IndiaWhat IT Leaders Can DoCIOs and other IT leaders face tremendous pressure to quickly develop GenAI strategies in the face of a potential supply shortage. With the cost of individual units, spending can easily reach into the multi-million-dollar range.But it wouldnt be the first time companies have dealt with semiconductor shortages. During the COVID-19 pandemic, a spike in PC demand for remote work met with global shipping disruptions to create a chip drought that impacted everything from refrigerators to automobiles and PCs.One thing we learned was the importance of supply chain resiliency, not being overly dependent on any one supplier and understanding what your alternatives are, Hoecker says. When we work with clients to make sure they have a more resilient supply chain, we consider a few things One is making sure they rethink how much inventory do they want to keep for their most critical components so they can survive any potential shocks.She adds, Another is geographic resiliency, or understanding where your components come from and do you feel like youre overly exposed to any one supplier or any one geography.Nvidias GPUs, she notes, are harder to find alternatives for -- but other chips do have alternatives. There are other places where you can dual-source or find more resiliency in your marketplace.Lastly, Hoecker says leaders must focus on forecasting. Forecasting is very critical for companies, but also quite a challenge in some of these markets that can be a bit cyclical. But the more you can forecast your own demand and work closely with your suppliers to make sure they understand what your forecast is, the more likely that the whole supply chain will have enough capacity.Real-time communication with suppliers is also a key, says Hudicka. IT leaders should digitize communication signals of supply and demand with a mix of suppliers. This delivers a first-mover advantage as global macro and micro signals of supply and demand rise in intensity from ebbs and flows -- to tsunami-sized shifts.Read more about:Supply ChainChip ShortageAbout the AuthorShane SniderSenior Writer, InformationWeekShane Snider is a veteran journalist with more than 20 years of industry experience. He started his career as a general assignment reporter and has covered government, business, education, technology and much more. He was a reporter for the Triangle Business Journal, Raleigh News and Observer and most recently a tech reporter for CRN. He was also a top wedding photographer for many years, traveling across the country and around the world. He lives in Raleigh with his wife and two children.See more from Shane SniderNever Miss a Beat: Get a snapshot of the issues affecting the IT industry straight to your inbox.SIGN-UPYou May Also LikeWebinarsMore WebinarsReportsMore Reports
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