Why Computer Chips Are Like Toilet Paper and Gasoline

There’s no question that there’s a global shortage of computer chips. What we don’t fully know is how much of it is caused by hoarding. As with other essential supplies—toilet paper and gasoline, to name two—people tend to over-order when they fear running out. That generates phantom demand. Suppliers that don’t realize the demand is fleeting can ramp up production too much, leading to the bust in a boom-bust cycle. “We believe the industry may be over-shipping to true demand,” senior analyst Chris Rolland of Susqehanna Investment Group wrote in a client note that was cited by Bloomberg earlier this month.

Techies with long memories may recall that happening two decades ago to Cisco Systems Inc., which had bragged of its unique ability to see deep into its supply chain. It heavily ordered components to keep up with soaring demand for its routers and other networking gear in 2000, only to crash when its order book evaporated. It “ended up having to write off $2.2 billion in inventory and lay off 14% of its staff,’ BusinessWeek reported at the time.