Because the chip shortage will continue
What happens on the chips. The analysis by Alessandro Fugnoli, chief strategist of the Kairos funds
If you find old records, audio cassettes or video cassettes in the attic and no longer find (or have never owned) turntables or players, you can still listen and see their contents. You can buy vintage devices on thrift sites or in modern antique shops (where tape recorders are also on sale) but if you want a brand new device you can still find, in some dark corner of electronics megastores, phono suitcases, turntables and readers.
They are generally produced by small niche houses, which may have taken over technology and machinery from larger houses, which have long since abandoned these lines. The design and the engine are in fact the same as 30 or 50 years ago, with some refreshes such as Bluetooth or the possibility of transferring the content to electronic formats. They are slowsellers, of course, but the enthusiasts who buy them are willing to pay a certain premium. For producers, who have long been amortizing costs, the margins are good. None of them, however, would think of investing heavily in research or new machinery.
Given the proper proportions, something similar happens in the world of semiconductors. There are two segments here. The first is the frontier one, aimed at the most technologically advanced uses. This is where a very heated (and full of low blows) strategic competition with China, which is still lagging behind on this ground, has been underway for two years. This is where enormous amounts of money come (and will be) for research and, even more, for the production of the machinery that will produce the next generation chips. And this is where the Taiwanese and, a little further back, American producers are positioned.
Then there is a second segment, dedicated to the production of bulkier and simpler chips for cars, consumer electronics and the potentially infinite number of objects that we are pleased to call the Internet of Things. They are useful for everything and we find them when we open the window or move the deflector of the car, when we do the laundry or cook dinner and even, as we have seen, in the turntables that survived natural selection.
The chips of this type, as Vincent Tsui of Gavekal notes, are typically manufactured by even major producers, but not necessarily frontier ones, who have purchased used machinery at low prices and sell large volumes at low prices.
When the pandemic broke out, many users of this second type of chip, including car manufacturers, cut their orders, while demand for the first type remained strong (think of video game consoles). The producers, in turn, have cut their volumes. However, already in the autumn it became clear that the demand for cars was exploding all over the world. With more cars requested by customers and fewer chips available, automakers (and with them consumer electronics manufacturers) are now in the paradoxical situation of having to close factories ( as Ford announced ) even as demand is very strong.
Even the chips of the first segment are struggling to keep up with the demand, but at least here we can count on the huge investments in new production capacity that will become operational in the short and medium term. In the less sophisticated segment, however, there are currently no significant investments in new machinery, so the expected shortage phase continues to lengthen over time, with Ford talking about another two years.
One might think that this is a limited problem, but there are already those who are revising the growth estimates for Asia and the sectors concerned downwards. And the situation is not very different in other sectors such as raw materials. If in some sectors such as oil the supply can be reactivated within a few months, in others, such as copper, it takes 5-10 years to put a new mine into production. It is also striking that the ongoing recovery, still halfway there globally, is already driving up the price of coal and uranium. Again, the lack of new investments in sectors considered to be in danger of extinction has the effect of increasing the margins of the surviving producers.
We have not long entered the new demand super cycle, made up of extraordinary fiscal and monetary impulses, which we are already seeing the first side effects. And these effects are not only on prices, but also on growth, if supply is not elastic and does not respond to prices.
Keynes's criticisms of Say's law, which argues that supply creates its own demand, are well known. And the supply-side super cycle is over precisely because it has been seen that stimulating supply by hindering demand creates output gaps and deflation.
However, the opposite also happens. The questioners are convinced that demand always creates its supply but this is not always the case, especially if, while stimulating demand, supply is depressed. It would be nice to have a world in which equal attention is paid to the two factors, supply and demand, but historically it is an infrequent circumstance.
That said, there is no need to worry too much about two factors.
The first is that if demand finds a hindrance in supplying a product, it can always turn to a different product. If savings have been accumulated all over the world in recent months and if animal spirits return to push the propensity to consume, those who do not find a car from the dealer and do not want to join a long waiting list will end up with spend it in other directions.
The second, highlighted recently by David Zervos, is that the crisis, like all recessions, has produced a significant increase in productivity, particularly in the United States. America in the first quarter of 2021 produced more, in real terms, than in the first quarter of 2020 and did so by employing 8.5 million fewer people. Technology and reorganizations have therefore made it possible to create a buffer of unemployed people who will be able to find a job without creating too many inflationary tensions in the phase of further growth that we expect for the next quarters.
In summary, we have a phase ahead in which we will still be able to press the accelerator without dangerously overheating the vehicle. However, the car will vibrate from time to time and the markets will react to these vibrations with more volatility and, from time to time, with corrections.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/innovazione/perche-continuera-la-carenza-di-chip/ on Sun, 09 May 2021 05:12:42 +0000.