Out of the Chips

In this article, Digital Transactions speaks with Ingenico's Peter Stewart and other industry experts regarding the microchip shortage and how it has caught up with POS terminal makers.

Since late 2019, when the incipient Covid-19 pandemic first throttled back or temporarily shut down microchip production in China, manufacturers like mobile phone and auto makers, whose products rely on the tiny squares of silicon, have been feeling the pain. POS terminal makers are no exception.

In the nearly two years since the chip shortage began, it has spread to manufacturers across the world. Now, lead times for POS terminal orders remain on the rise as manufacturers scramble to raise production to meet demand.

During the past year in particular, lead times for orders have jumped dramatically. In some cases, terminal distributors are quoting 26 to 30 weeks for orders that, pre-Covid, took 12 weeks to fill, says Andrew Dark, executive chairman for Miura Systems, a United Kingdom-based provider of mobile-payment technology with offices in Timonium, Maryland.

The shortage, which is largely centered on the microcontrollers within POS terminals, has become so acute that some terminal makers have reportedly run out chips for specific models for a quarter of the year or longer.

Some makers are turning to the spot market—and, reportedly, even the gray market—to secure chips at a premium, which they either absorb or pass along to their customers. Premiums paid to chip suppliers in these channels can reportedly run as high as 100% or more over retail prices.

‘18 Months of Pain’

Not surprisingly, the shortage is starting to force some payments-technology providers to lose business. In July, new POS implementations were down by 10% as a result of the shortage, says Alfred “Chip” Kahn, chief executive and founder of Boomtown, a provider of consulting services for POS equipment installations.

With deployments down and no end to the shortage in sight, terminal makers are putting more resources behind their production forecasting to temper customer expectations. One reason is that customers may only be able to order 50% of what they need while the shortage continues.

In terminal makers’ minds, it’s better to tame expectations up front than to tell clients at the 11th hour prior to delivery that only a portion of their order can be filled, payment experts say.

Making matters worse is that the chip shortage is not expected to show any easing until mid-2022, at the earliest. Some forecasters, indeed, warn it could last longer because of disruptions in the supply chain for the raw materials needed to produce microchips.

“As one terminal manufacturer told me, it’s been 18 months of pain,” says Sam Shawki, chief executive for MagicCube Inc., a provider of technology that enables smart phones to work as payment terminals. “We expect the situation to get worse before it gets better.”

‘Needle in My Side’

How well terminal makers have managed the chip shortage so far depends on a variety of factors, including inventory levels before the shortage began and the demand for particular terminal models.

“Different manufacturers—and different models or product lines at a manufacturer—can have very different amounts of product availability,” says Derek Webster, chief executive and founder of New York payment applications provider CardFlight, Inc. “For some of the models we sell, including some of our most popular products, we have significant supply on hand and are able to fulfill orders without disruption. Other models have experienced stretched lead times.”

Tempering customer expectations with highly accurate production forecasts is the strategy terminal makers are pursuing. “The key to managing customer expectations is transparency,” says Peter Stewart, executive vice president, North America, for Ingenico.

Accurate production forecasts start with having strong relationships with chip manufacturers to determine their actual monthly output. Even then, terminal makers can struggle to minimize the disruption to their business. “Even though we have good relations with all our manufacturing partners, we are still feeling the effects of the shortage, and at times have had to turn to other sources,” Stewart says.

While sourcing components from a new supplier as needed can help terminal makers keep up with demand, it is not always a practical solution as POS terminals have to meet processor and payment-network certification requirements. If a chip sourced through a new supplier does not meet those requirements, it can take months to receive certification, which only slows production further.

When Ingenico turns to the spot market to secure components in a pinch, it deals only with suppliers that meet its quality and certification standards. “Any component we purchase has to meet our quality and technology requirements, even in good times,” says Stewart.

But backlogs in chip production aren’t the only problem feeding the overall shortage. Freight carriers have had their business disrupted by the pandemic, too, which in turn is slowing delivery not only of chips but of terminals, as well.

While sea and rail carriers, many of which were idled for weeks or months at the outset of the pandemic, are returning to normal operations, a lack of available space and cargo containers, as well as increased shipping timeframes and costs, are feeding the shortage.

“The freight sector remains challenged by the pandemic and is still impacted by capacity constraints and higher costs,” says Stewart. “We continue to have open communication and collaboration with our freight carriers.”

Such constraints also extend to the delivery of the raw materials used to manufacture microchips. The problem began at the outset of the pandemic in late 2019, when China, a major manufacturer of microchips, imposed restrictions on in-country travel and freight movement. These rules significantly impacted the country’s chip production.

“At the outset of the pandemic in China, components and materials could not move within the country, which meant components couldn’t get to assembly points and raw materials to manufacturing plants,” says Miura Systems’ Dark. “While the chip shortage initially impacted the electronics industry, it quickly moved to other industries, such as the terminal market. The shortage has been a needle in my side for nearly a couple of years.”

‘Complex And Dynamic’

One problem starting to rear its head for payment-technology providers is how to service a new customer, especially one that comes over from a competitor, without hurting their existing core customers. “That is something we have to take into consideration,” says Rob Hayhow, vice president, North America for device provider Equinox Payment LLC.

Given how far-reaching the pandemic’s tentacles are when it comes to disrupting chip production and availability, it’s no wonder payment industry executives refer to the shortage as a cascading problem. Not only are microcontrollers in short supply, there is a shortage of chips for terminal screens and even raw materials for other components, such as resins to produce plastic, which is used for various parts of a terminal in addition to the body.

“Whether it’s materials, shipping, or manufacturing, the supply chain is stressed,” says Hayhow. “You can shake every tree to find an alternative supplier, but you just can’t change a supplier without first ensuring quality standards.”

Indeed, it can take more than a year to certify a chip or component from a new, uncertified supplier, which, under the current market conditions, makes the component unsaleable, Dark says.

Switching suppliers for any terminal component can also lead to production delays that can subsequently cause delays on the freight side, because the manufacturer literally missed the boat when it came to meeting its freight carrier’s shipping schedule.

This can happen even though the manufacturer eventually got its hands on the components to produce the terminal, according to Hayhow. “The chip shortage is a complex and dynamic issue,” he says.

While the shortage has impacted production of other terminal components, such as cable and accessories, the good news is that the shortage of those items is less severe than that for chips, says Ingenico’s Stewart.

Another consequence of the shortage has been an increase in prices for used terminals. “The used terminal market is thriving on marketplaces like Amazon, eBay, and other technology-focused marketplaces,” says John Jakobe, market intelligence manager for the Strawhecker Group, a payments consultancy.

Faced with high demand, many chip manufacturers have begun to ramp up production either by expanding capacity at existing plants or by bringing new plants online. But there is still a significant lag time before those efforts start to bear fruit.

“Even with more manufacturing capacity coming online, it takes months for new plants to be built and ramp up production, and existing plants to deal with the current backlog of orders,” says Dark, who adds he has not seen this kind of backlog in microchips since the 1990s

“Back then, it took ten months for new plants to come online,” he continues. “While we see a continual push in demand, we don’t see a corresponding expansion in production or availability.”

A Wild And Bumpy Ride

Despite the bleak near-term outlook for chip production, the shortage has not had a crippling effect on the payments space, says Jakobe. Never­theless, to weather the logistical issues and production delays the chip shortage is causing, there are several steps terminal makers, distributors, and especially payment-technology providers that sell terminals, can take.

The first step is preparation. “For many years, we have maintained extra inventory on hand and placed orders with our suppliers well in advance to help ensure minimal disruption to our customers from any supply-chain challenge,” says CardFlight’s Webster. “Having supplies on hand has made it easier to work through any short-term disruptions.”

In addition, all parties in the terminal supply chain must get in the habit placing orders further in advance to accommodate longer lead times. “The ‘just-in-time’ purchasing model has significant challenges during times when supply is tight, like the present,” Webster says.

One strategy CardFlight has used to cope with the chip shortage is to modify its software to support additional terminal types and models. This can increase the range of options available if any terminal a merchant needs is out of stock but viable substitutes are in stock.

Looking ahead, payment experts expect many of the changes terminal makers, distributors, and buyers have made to cope with the chip shortage to stick once it eases. If anything, terminals makers will continue to put more resources behind obtaining accurate chip forecasts and encourage their customers to order using longer lead times.

“While there’s no question the chip shortage has put a strain on our whole organization, some of the changes we’ve made to cope will be kept,” says Hayhow. “Some of these changes have made us a more cohesive organization and also strengthened customer relationships.”

But until the shadow the chip shortage has cast over POS terminal production lifts, payment experts advise buckling up for a wild and bumpy ride for at least another nine months.

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