3 Shifts (Feb 12 2021): Global chip shortage, Water-facility hack via remote desktop, Archer-United’s $1B air taxi deal

(1) The global chip shortage is putting billions of dollars at risk across industries (0:37). (2) Water-facility hack exposes flaws in remote-desktop software & industrial control systems (6:33). (3) Air-taxi startup Archer goes public & signs $1B deal with United (10:16). Read this 3 Shifts Edition:  https://6pag.es/qf9hb. Sign up to receive free summaries of our deeply researched briefs: 6Pages.com.

Chapters

• 0:37 (1) The global chip shortage is putting billions of dollars at risk across industries
• 6:33 (2) Water-facility hack exposes flaws in remote-desktop software & industrial control systems
• 10:16 (3) Air-taxi startup Archer goes public & signs $1B deal with United

Transcript

Hello and welcome to this week’s 3 Shifts Edition by 6Pages, the source for far-reaching market shifts and what they mean. It’s 2/12/2021. I’m Eric Thompson, and here are the 3 shifts that you need to know this week:

1. The global chip shortage is putting billions of dollars at risk across industries
2. Water-facility hack exposes flaws in remote-desktop software & industrial control systems
3. Air-taxi startup Archer goes public & signs $1B deal with United

1. The global chip shortage is putting billions of dollars at risk across industries

• Severe shortages of semiconductor chips are putting tens of billions of dollars in revenue at risk across industries. In 2020, the semiconductor industry grew by 6.5% – chipmakers were already operating at capacity making high-end smartphone and data-center AI chips, as well as meeting the broader surge in demand for laptops and home electronics.
• There was also the blacklisting of Chinese state-backed chipmaker SMIC, the stockpiling of chips by industry players (both in China and elsewhere) and an ongoing shortage of chemicals and substrate materials. In early 2021, all this boiled over with the rebound of demand in cars (which use chips made on older 200-mm wafers – an area where chipmakers have chronically under-invested in capacity).
• The automotive industry has been among the hardest hit. GM, Ford, Honda, Nissan, Daimler, Volkswagen, and Stellantis (the re-branded Fiat Chrysler-PSA Group) have all slashed production. Many have shut down whole factories. Ford’s Q1 2020 output could be cut by as much as 20%. As consumer demand rebounds, automakers could lose up to $61B in revenue.
• TSMC (Taiwan Semiconductor Manufacturing Company) – the world’s largest chipmaker – is at the center of the crunch. It serves half the foundry services market as a contract manufacturer for chip designers. In automotive, TSMC makes 70% of the microcontroller units used in cars but automotive comprises just 3% of its revenue. Automotive chips are also lower-margin than smartphone or server chips – many cost less than a dollar – so they would normally be lower-priority for TSMC. Given the worldwide attention (including a meeting with the Biden administration), TSMC has said it plans to prioritize chips for the auto industry.
• The tight chip supply and pivot by foundries to support the auto industry are driving a cascade of shortages in other sectors, such as smartphones, gaming consoles, and solar power. Qualcomm, the world’s largest mobile-chip supplier, is seeing shortages “across the board” and says it cannot meet demand. Sony blames PlayStation 5 console delays on shortages; AMD, which designs the processors for both Sony and Microsoft’s consoles, relies on TSMC-made chips. This week, solar power firm Enphase Energy said it was also facing chip-related constraints in its supply chain.
• Even Apple with its negotiating power has seen tight semiconductor supply, which continues to hurt production and sales of the iPhone 12. Samsung has suggested that industry-wide constraints on smartphone production could even affect downstream demand for its mobile memory chips.
• Chip-manufacturing plants can take two years to set up and chips can take 3-6 months to make. Combined with global chip sales projected to be up 8.4% in 2021, the shortage is expected to continue for months at least and into the second half of 2021.
• Automakers are learning a painful lesson in the risks of “just-in-time” supply chains. Many cost-conscious automakers took the lean-manufacturing approach of keeping relatively little inventory on hand and cancelled chip orders after the economy was hit in the early pandemic. Foundries redirected capacity to consumer electronics and servers, and automakers ended up being last in line when demand rebounded. It’s also not easy to transition chip production lines – it can take 6-9 months.
• The few OEMs who have navigated the crisis well were more forward-looking. Toyota has a 4-month stockpile of chips as well as “stable relationships” with its suppliers. Hyundai/Kia and BMW have also secured long-term semiconductor supply. More automakers are beginning to consider maintaining more safety stock.
• The current crisis is highlighting the concentration in the chip manufacturing industry. Even in the cases of Qualcomm and automotive chip suppliers NXP, Infineon, and Renesas, much of the actual chip production is outsourced to a few Asian players. As of Dec 2020, TSMC accounted for 55% of the global market and Samsung Electronics represented 16%. (Chinese chipmaker SMIC continues to face US restrictions that have hampered sales.) The concentration is even greater in high-end chips – in some segments (e.g. 5-nanometer), TSMC and Samsung are the only vendors. TSMC – which has invested billions in becoming the leader in chip production technology ($28B in capex planned this year alone) – is the only provider of the most advanced silicon.
• Policymakers are stepping in to support domestic industries, though most plans are longer-term. China, for instance, is moving on long-held ambitions to grow its own high-end chip-manufacturing industry. Yesterday also saw an open letter to US President Biden by 21 CEOs of chip companies urging more support for US chip manufacturing. The Biden administration is working to address bottlenecks, and an executive order is expected initiating a review of the US supply chain for critical goods like semiconductors. The EU is launching a chip alliance this quarter, considering building an advanced chip factory, and coordinating around a project with up to $60B of investment for chip manufacturing.

Related Content:

• Jun 26 2020 (3 Shifts): Apple reinforces its walled garden with Apple Silicon chips in Macs
• Apr 4 2020 (Brief #28): Global supply chains diversify away from China

2. Water-facility hack exposes flaws in remote-desktop software & industrial control systems

• Last week, a water-treatment facility in Florida supplying water to 15,000 people was hacked through remote-desktop software TeamViewer. TeamViewer is designed to let enterprise users and engineers remotely access, support, repair or control connected devices (e.g. computers, phones, industrial machines). The plant had actually changed software vendors but had not removed TeamViewer from its network. In the incident, the hacker used TeamViewer to remotely access a computer in the plant two separate times and increase the amount of sodium hydroxide (lye) in the water by 111X to dangerous levels. An operator saw the hacker control the mouse in real time and make the changes on the computer screen. The operator immediately reverted the changes so no harm was done. (Other safeguards were also in place to alert operators of issues).
• TeamViewer is widely used by organizations – serving 200M+ users and 2.5B connected devices across 200 countries. The company has benefited from stay-at-home measures during the pandemic, with sales growing 44% in 2020 to $557M+ and expected growth of 30% in 2021. Following the hack, the FBI issued a Private Industry Notification (PIN), which named TeamViewer as an application enterprises need to be aware of. While the PIN was not highly critical of TeamViewer, the FBI called it “functionally similar to Remote Access Trojans (RATs)" in its ability to control the desktop and insert files onto a computer.
• TeamViewer became “almost ubiquitous” in industrial control system (ICS) environments during the pandemic. Most drinking-water systems, for instance, are underfunded and unattended and use a remote-access system like TeamViewer for monitoring. Cybersecurity experts have since spoken out against TeamViewer for its insufficient security measures – allowing full control of critical resources with just a password. Insecure implementations of TeamViewer have become a meme in some parts of the cybersecurity community.
• Even before the pandemic, operational technology (OT) that controls industrial equipment was a major cybersecurity vulnerability. Legacy industrial systems that control critical infrastructure such as public utilities have increasingly become connected to the internet with relatively few protections in place. ICS often uses open communication protocols that allow software like TeamViewer to operate across systems unhindered by gateways or air gaps, meaning that a cybersecurity intrusion within one part of the system (e.g. TeamViewer) could cascade into others.
• One recurring theme of cyberattacks is how often people and processes are among the main sources of vulnerability. In this case, the intrusion appears to have taken place through access to password credentials – perhaps through weak passwords, password-sharing, and/or lack of controls such as mandatory password changes. And the remote-work boom has only made things worse – a Fortinet cybersecurity report found that 92% of organizations had at least one OT-system intrusion in 2020.

Related Content:

• Dec 4 2020 (3 Shifts): Advances in remote customer service – from cloud-based contact centers to chatbots
• Jul 24 2020 (3 Shifts): APIs, antitrust & entrants – The latest in the collaboration race 

3. Air-taxi startup Archer goes public & signs $1B deal with United

• Archer, the electric vertical take-off and landing (eVTOL) aircraft startup working on urban “air taxis,” picked up several big wins this week. First, Archer, which was valued at just $100M in Jul 2020, went public via a SPAC merger with Atlas Crest Investment that valued the company at $3.8B. As part of the merger, Archer received $1.1B in funding, including $600M from private investors such as United Airlines, Stellantis (the merged Fiat Chrysler-PSA Group), and Abu Dhabi-based sovereign fund Mubadala.
• Archer expects to reveal its full-scale eVTOL aircraft later this year, begin producing its aircraft in 2023, and start flying consumers in 2024. It projects it will reach production of 1,000 of its Maker eVTOL aircraft by 2026, and ramp up to 5,000 per year. Fiat Chrysler announced a partnership with Archer last month to help reduce the costs of producing the aircraft at scale.
• Separately, Archer closed its first major eVTOL order, a $1B deal with United Airlines. United will help develop Archer’s battery-powered aircraft, which currently can carry 4 passengers up to 60 miles at 150 mph. United will acquire a fleet of up to 200 of Archer’s Maker aircraft once they are operational, with an option for an additional $500M order. The air taxis will be operated by United affiliate Mesa Airlines.
• United wants to provide customers a convenient way to travel to United’s hub airports and commute in urban environments, while reducing its carbon emission footprint. In an eVTOL, the 18-mile trip from Manhattan to JFK Airport would take just 22 minutes (7 min in the air). United estimates that use of Archer’s eVTOL aircraft on a trip from Hollywood to LAX airport could reduce carbon emissions by 47% per passenger.
• The urban air mobility (UAM) market is still very early stages but holds potential. eVTOL air taxis represent another evolution of ride-hailing that could solve particular needs – such as medical transport, courier services, and airport commutes – though they may not be as widely adopted as Uber anytime soon. With over 56% of the world’s population living in cities (a figure expected to reach 68% by 2050), eVTOLs also present an avenue for reducing congestion and pollution. Looking ahead, fully autonomous aviation – which Archer hopes to reach by 2028 – holds the promise of pushing the cost-performance frontier out even further.
• A number of challenges will have to be overcome, however, before air taxis are a reality – including regulation and industry standards, air-traffic management and operational safety, and infrastructure (e.g. for charging and take-off/landing). Nevertheless, a recent Roland Berger report predicted that air taxis will be a $1B market by 2030 and that we may see 160K air taxis generating $90B in annual revenue by 2050.
• Archer is vying with as many as 200 other companies for the urban air mobility market. Other noteworthy UAM companies include Toyota-funded Joby Aviation (which in Dec 2020 purchased Uber’s Elevate air taxi unit and just started generating revenue this week); Volocopter (which is looking to launch its services in the EU, US and Southeast Asia, potentially within 2-3 years pending regulatory approval); Lilium (which just partnered with Lufthansa to train pilots for its eVTOL Jet); Wisk; EHang; and Hyundai.

Related Content:

• Jan 7 2021 (Brief #40): Breaking down the EV barriers – Vehicle range, price, charging infrastructure
• Apr 28 2020 (Brief #31): Robotaxis, local delivery & the future of driverless ground vehicles

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