Impact of 2021 global chip shortage on the secondary consumer electronics space

By now, everyone is probably aware that a global chip shortage is impacting multiple industries, including automotive, gaming, IT and of course mobility. If OEMs and manufacturers do not have the parts required to churn out brand new products though, how does it impact the secondary market for consumer electronics (CE) products?

Let’s first quickly review the reasons for this chip shortage. Due to COVID, a number of commercial lanes shut down last year. Global supply chains everywhere were severely impacted and many orders were delayed or canceled outright. After years of “process efficiencies”, all the slack had been removed from the system and there was just no margin of safety for such a drastic event.

In most industries, things are back to normal by now. Why is there still an issue in the electronics space then? As a result of so many people working or studying from home, demand for computers, consoles and tablets has skyrocketed since Q2’20. Chip manufacturing plants cost many $Billions each and take years to stand up. With a utilization already well over 90% in most cases, there just wasn’t enough slack in the system to absorb that incremental demand and things have just gotten worse, resulting in one of the most dire shortage situations of the last few decades. [Note: I posted some links at the bottom of this article if you want to read more about it]

Back to our initial question then, what does it mean to the supply and demand of used consumer electronics?

Supply side

  • Manufacturers are limited in their ability to build as we’ve just seen, and therefore try to protect their most profitable (aka, ‘expensive’) product lines. In other words, the supply of brand new flagship (premium) products is generally keeping up with the demand at the expense of that of cheaper items, for a net reduction in overall supply of new products / increase in average price.
  • At the same time, the popularity of trade-in (TI) programs continues to increase, for reasons ranging from (a) cheaper alternative to previous marketing programs to (b) convenient way to source insurance products to (c) high attach rates; Very popular for years in the phone and tablet spaces, we are starting to see more TI programs for laptops, computers, consoles, even headsets or smart watches. The net effect is increased consumer returns and therefore additional supply of used products.

=> Overall, the global supply of CE products remains roughly flat, with an increased share of used in the volume mix

Demand side

  • When we started the Samsung Certified Pre-Owned program circa 2013/2014, market research suggested up to 15% of the population ‘may’ be interested in used products but probably just 5-7% were ready to purchase then. These numbers have increased substantially since then, and the secondary market continues to grow quickly in size even as the market of new is generally about flat. Today, consumers looking for a good product at a fair price are limited in their choice of new products due to this chip shortage – especially if they are unwilling / unable to splurge on the top of the line. Demand for used products therefore remains extremely strong in 2021 after a fantastic 2020.

So, again: what does it mean to the used CE space? With a still-booming demand combined with slow growth in supply, some of the following is happening:

  1. Increased competition for access to supply of used products => more trade-in programs, to convince consumers to upgrade and return their old products
  2. Upward pressure on price => flatter price degradation curve for high grade products
  3. Increased interest in product refurbishment => strong demand for low grade products & spare parts including screens and batteries
  4. Increased demand for international, non-FCC compliant products in the US since these tend to be cheaper
  5. Yes, increased gray business (Frankenstein phones, non-OEM parts and other questionable business practices). One way or the other, the market will find ways to supply the incremental demand

In summary: Overall and unsurprisingly, we can expect the current chip shortage to be very beneficial to the whole re-commerce / 2nd life industry. With few barriers to entry, the competition will continue to intensify.

As often in our space, we can probably expect to find 2 kinds of winners in this environment: the hustlers, and the builders. The former somehow always find a way to be in the right place at the right time; the latter relentlessly improve current capabilities and build new ones. If you don’t know which camp you are in and think a rising tide lifts all boats… there might be some rough sailing ahead!

Bonus thought: OEMs with a strong vertical integration and broad range of price points (e.g., Samsung) should fare comparatively better due to their ability to allocate the supply of chips to premium products. Conversely, OEMs who only sell in a smaller price range and/or outsource much of their production can be expected to be much more impacted by the market’s gyrations.

Some more background reading on the chip shortage:

https://en.wikipedia.org/wiki/Chip_shortage

https://www.bloomberg.com/graphics/2021-semiconductors-chips-shortage/

https://www.theverge.com/2021/4/7/22368552/global-chip-shortage-end-tsmc-samsung-ps5-supply-demand-intel

https://www.theverge.com/2021/4/12/22380920/pc-market-q1-growth-year-over-year-chip-shortage-covid-demand

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