All the effects of the semiconductor shortage. The analysis by Roberto Rossignoli, Moneyfarm Portfolio Manager
The shortage of semiconductors, a common component in electronic circuits and present in virtually every consumer technology item, from cell phones to televisions, is worrying the supply chains of many major companies and is the result of a perfect storm in the economy and logistics. The shortage of components and, by extension, the consumer technology products that use them can be largely attributed to the pandemic. Going to dig into the reasons for this silent crisis, several considerations can be drawn.
THE LAW OF SCARCITY AND DEMAND
But how is it possible that such a crucial commodity for the functioning of the world economy has become scarce? Much of the answer can be found in the quarantine measures imposed by governments around the world. With people locked up at home, there has been a sharp increase in demand for consumer technology. Not only are people looking for ways to pass the time, but (in some cases) they also have significantly more disposable income than usual. Sales of personal computers, for example, have increased due to working from home, with many governments making direct resources available to purchase the devices. Another major contributor to semiconductor demand has been the server sector. Server sales spiked 21% year-over-year, with the explosion of online activity and remote work increasing the need for server capacity exponentially. Most companies that offer their online services, in fact, do so in the cloud and need powerful server parks to operate. These two trends have resulted in an increase in demand for semiconductors globally.
A SYMBOL OF US-CHINA RIVALITY
If there is one component that best encapsulates the struggle for economic power between the United States and China , it is the semiconductor, an industry at the center of the geopolitical challenge for the technological domination of the two world superpowers. To get an idea of the competition, just look at the sanctions imposed on some Asian companies by the United States in the past two years. Since May 2019, for example, the US has imposed trade sanctions on telecom giant Huawei, including a blockade of all US and foreign semiconductor companies that sell chips to Huawei. Similar measures have been threatened against apps like TikTok and WeChat, Chinese companies that the US fears may become dominant in their industries. Among the major semiconductor companies, sales to China are on average 27%, with some companies selling up to 50% on the Chinese market: these are companies that, if economic tensions intensify, could find themselves subject to sanctions and limitations on where and how to trade.
THE IMPACT ON MARKETS
In the short term, it is likely that if the semiconductor shortage continues, we could see a negative impact on the actions of the many companies that, in one way or another, are involved in this supply chain. But in expanding the field, the semiconductor crisis is symptomatic of the major challenges the global supply chain is facing. These increasingly frequent bottlenecks can manifest themselves as higher prices and longer delivery times. This is very significant from a financial point of view, at a time when markets are focused on inflation risk. Delivery times for some types of semiconductors are at an all-time high and this could lead to slowdowns in production and possibly lost sales for a range of consumer goods (from electric cars, to computers, to tablets). If the impact were large enough, we could see it reflected in weaker earnings growth for a number of companies active in the consumer technology sector. A shortage of semiconductors could therefore represent the first real supply shock in several years and recall the years of the oil crises, with very high inflation and uncertain markets. If you think about the importance that semiconductors have in our lives, the comparison with the oil of the 70s does not seem so risky.
In the medium term, we expect supply chains to normalize, but this will likely require an increase in semiconductor manufacturing capacities globally. Increasing production capacity is costly and time-consuming, which could mean less cash flow for manufacturers today, but more growth in the future. It is also likely that the issue of the geographical location of plants will increasingly arise, as governments are increasingly attentive to guaranteeing security of supply for strategic supply chains. Ironically, in the long run, this could also mean global overcapacity.
THE DEFICIENCY WILL END, THE QUESTION NO
In the future, more and more products will be automated or networked and, to do this, semiconductors will be needed. Think of China's investments in “smart cities”, which, based on IDC data, will increase by 13.5% in the period 2020-2023. Globally, the "smart city" market is expected to grow 24.7% from 2020 to 2027, according to a new study from Grand View Research.
Equally impressive growth is expected for the automotive industry. BCA Research predicts that the global automotive chip market will grow 9% by 2024, as it did between 2014 and 2019. This is largely due to the digitization of the industry – the average value of semiconductor content in a standard vehicle is $ 330, while hybrid electric vehicles can hold between $ 1,000 and $ 3,500 worth of semiconductors.
Ultimately, the semiconductor shortage will end. Due to the blockages linked to the pandemic and changes in working life, there has been a boom in demand in recent months. Unfortunately, this boom coincided with a reduction in supply, but we are confident that the manufacturing companies will be able to recover the gap that has been created between supply and demand, increasing production to meet the growing demands of the market.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/semiconduttori-carenza-crisi-microchip/ on Sun, 06 Jun 2021 06:00:50 +0000.