The world suffers from a significant shortage of semiconductors, the chips used in almost all technologies today, from laptops to televisions to video game consoles.
Big auto giants had to cut production while Samsung discontinued its Galaxy Note 21 model and Apple supplier Foxconn warns that parts will be delayed until next year.
New analysis by investment firm PIMCO suggests that while the shortage will soon be alleviated somewhat, demand for semiconductors will continue to grow as they are used in new ways. But how did we come to this position and what will its long-term consequences be?
There is currently a kaleidoscope of factors that negatively impact chip manufacturing, but PIMCO’s Geraldine Sundstrom suggests two main reasons: U.S.-China trade tensions and supply disruptions due to the coronavirus pandemic
What are the causes of the deficiency?
There is currently a kaleidoscope of factors that negatively impact chip manufacturing, but PIMCO’s Geraldine Sundstrom suggests two main reasons: U.S.-China trade tensions and supply disruptions due to the coronavirus pandemic.
Many Chinese chip makers rely heavily on American technology to make chips. However, after the Trump administration began putting limits on technology exports to China, companies began stockpiling chip technology, resulting in scarcity.
Then the pandemic started. Orders for electronic goods such as personal computers rose, but chips for cars declined and semiconductor manufacturers turned away from industrial chips. When the auto companies saw orders picking up again, they were hit by a shortage.
The global chip shortage has resulted in automotive companies stopping the production of certain vehicles. General Motors has stopped manufacturing its Chevrolet Equinox vehicles (pictured above).
Added to this were natural disasters: the February storm in Texas that shut down the state’s computer chip facilities and a 7.3 magnitude earthquake in Japan that shut down operations at chipmaker Renesas’ factories. Everyone has come together to make this shortage possibly the worst the electronics industry has ever seen.
What has affected the manufacturers?
In February, analytics firm IHS Markit found that lead times – the time between receiving orders and fulfilling orders – had increased for three-quarters of semiconductor parts, while 18 percent saw an increase of five to ten weeks.
The automotive sector was found to be particularly hard hit by bottlenecks. Volkswagen stopped manufacturing Audi and VW in Europe, China and North America, and General Motors stopped building its Chevrolet Malibu and Equinox models.
Toyota and Honda are two other companies affected, and IHS Markit estimates the shortage will cost the industry $ 60 billion in lost sales this year.
In the meantime, chipmakers are having trouble ramping up production. The world’s largest semiconductor maker – Taiwanese company TSMC – is investing $ 100 billion in expansion, but its factories are in need of lots of water, and Taiwan is currently suffering from a major drought.
Will this make electrical appliances more expensive?
According to Sundstrom, PIMCO has found that the scarcity is having an inflationary effect on prices for IT hardware and, for the first time in decades, for Chinese home appliance manufacturers.
Bitcoin’s developers – known as miners – are buying a lot of computers and high-end chips, adding to concerns about bottlenecks and higher prices in the semiconductor market
‘This partly also reflects the inadequate supply of raw materials such as substrates or wafers. The macro implication is that supply bottlenecks could drive prices up and reduce retail sales and margins for semiconductor-intensive devices, ”she notes.
However, it does not believe that rising chip costs for automotive companies will have a massive impact on inflation, since even a 10 percent increase in car chip prices would only lead to a 0.2 percent increase in production costs.
One source of inflationary pressures is Bitcoin. The creators of virtual currency – known as miners – are buying a ton of computers and high-end chips, adding to concerns about shortages and price hikes.
How long will it take and what effects will it have?
Sundstrom says that while she expects the deficit to “decrease somewhat” in the second half of 2021, especially for auto companies, high semiconductor sales will continue.
PIMCO’s Geraldine Sandstrom believes that Asian countries with strong semiconductor industries such as Taiwan and South Korea will continue to perform well over the next three to five years
In the long term, she predicts a “semiconductor super cycle” – a long period of solid demand above the long-term price trend – in which chips for use in old and new technologies will be ordered on a large scale.
Asian countries with strong semiconductor industries such as Taiwan and South Korea will benefit in the next three to five years, as will chip device manufacturers and market leaders who are good at bargaining with chips.
Hargreaves Lansdown’s Laura Hoy points to suppliers Nvidia, Applied Materials and Intel as potential beneficiaries of a surge in chip prices and the wider changes affecting the global economy.
She explains, “The move to remote working, the adoption of 5G and the production of electric vehicles will continue to support demand while suppliers are bogged down by ongoing tensions between the US and China. This likely increases chip prices and decreases margins for everyone who uses them.
“When it comes to chip users, bigger, more established companies like Apple have an advantage because they have the power to negotiate better prices and secure chip shipments. It’s bad news for smaller players like the wave of new EV companies whose already thin and often nonexistent margins will continue to deteriorate. ‘
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