Ongoing Global Chip Shortage: Analysing The Effect On The Global Toy Business

 

Ongoing Global Chip Shortage: Analysing The Effect On The Global Toy Business

There is currently a major global shortage of chips required to make high end electronic items. Major consumer electronic companies are struggling to supply to demand due to the shortage – for instance, Samsung are reportedly reviewing their new phone launch plans, new gaming consoles from both Sony and Xbox are also badly impacted. Analysts are suggesting that this shortage is going to persist at least through 2021, and most probably into 2022. New chip factories are probably on the way partly due to rising demand, but also due to geopolitical security concerns – so much depends on the supply of silicon chips these days that any supply issue can quickly become a national security issue. New factories though take up to 2 years to build, set up and ramp up, so there is no immediate solution on the horizon.

The reasons for this shortage are classic supply & demand, and don’t really concern us here. What we are interested in though is the impact of the chip shortage on the toy business. Here’s our analysis on this:

  1. Console & games sales will be negatively impacted – historically speaking, new console launches nearly always negatively impact the toy business as consumer spending is diverted to pay for new consoles and then typically an extensive array of games. When supply is restricted on or around a new launch three things tend to happen a). immediate and ongoing spending go elsewhere and often don’t come back b). pricing goes up to sometimes ridiculous levels pricing many families out c). game developers don’t buy into the new platform to the degree they would have if supply were plentiful – because video games development costs a lot of money, and every new version costs even more. Now the reality is that major gams developers will still have to develop and launch games for new consoles, but they will tend to need to pair back spending if the instal base of the console is not that high. The bottom line on all of this is that whereas new console launches normally herald negative sales impact on the toy business, the chip shortage should significantly reduce that impact.

 

  1. A limited number of top end electronic toy products will also suffer supply issues – thankfully the vast majority of toys sold have no electronic components, and even fewer feature the chips which are now in short supply. This may hamper some companies more than others and may lead to the postponement of some upcoming new launches at the high end of the toy market. One of the issues for toy companies affected is the lack of leverage versus the major consumer electronics companies whose volumes and spend are so much greater, and who will therefore be more able to secure available supply.

 

  1. Tablet & Phone sales will be impacted – any children looking to get a new phone or tablet will find that supply is not as strong as it normally would be, which generally speaking could be expected to drive up pricing. Again, without going into all the details of how phones are made and the important role that chips play, the bottom line is that of supply of these high-end gadgets is restricted that should act to increase demand for top end, higher price point toys.

 

So overall it is hard to see how the global chip shortage can be a bad thing for the toy business in 2021 overall. There may well be some repressed demand for consumer electronics heading into 2022, and that could act as a drag on toy sales, but for now, the situation seems to be a potential positive for the toy industry in 2021.

 

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