The global shortage of semiconductor chips is on track to become one of the most relevant economic phenomena of the year (the two are related). Much has been written about the problems faced by manufacturers of cars, game consoles or telephones to maintain their production due to the lack of chips. Far from improving, however, the situation appears to have gotten worse, and looking ahead to the coming months there are three major risks that threaten to torpedo chipmakers, making shortages much more acute and dangerous for the economy.
To date, the shortage has been caused by semiconductor chips. Today, a good part of material goods have many chips (refrigerators, washing machines, telephones, cars, electric scooters…). At the start of the covid pandemic, many of the manufacturers of these goods decided to reduce their orders for chips ahead of expectations of lower sales.
However, the demand for a large part of these durable goods has remained stable or increased during the covid (computers, electronic devices…), while that of other goods has skyrocketed as the economies reopened. Chip manufacturers are and will continue to be in the coming years if demand remains at current levels, according to industry sources.
New risks in the offer
That is the demand situation. The worst thing is that now the supply (the big chip manufacturers known as foundries), which is highly concentrated in Taiwan and South Korea, faces great risks. If any of these risks materialize, the chip market could suffer a kind of perfect storm that leaves the market dry, fully impacting the recovery of the economy. If there are no chips to produce, consumption and investment will take off more slowly than expected, hindering growth and the long-awaited recovery of the economy.
Óscar Muñoz, strategist at TS Securities, explains in a note for clients that Taiwan’s market share in terms of pure chip manufacturing (it does not have to include chip design) is, with the help of the the TSMC industry. Then comes South Korea with a share of 18%. Unlike vertically integrated Intel or Samsung (they design and manufacture their own chips), TSMC makes chips for American designers like Qualcomm, Broadcom, and NVIDIA, which they then end up selling to big customers like Apple, Samsung, and HP. TSMC also makes chips for other semiconductor companies like Renesas, which then supplies automakers like Toyota, Tesla and Ford.
Taiwan is everything in the chip industry and that is a vulnerability. A small country that, if it suffered any setback, would put world technology against the ropes. Iris Pang, economist at ING, reveals three major risks that could jeopardize the chip industry and the global economy. Three risks that hang over Taiwan, a country smaller than Aragon, but which is vital for world technology.
The first of these, explains Pang, is the scarcity of water for the chip production process due to the drought that the country has been experiencing in recent months, which has been somewhat attenuated with the rains of recent days, but which still present.
Semiconductor manufacturing requires large volumes of ultrapure water to prevent contamination of electronic devices. A typical semiconductor factory uses eight to fourteen million liters of ultrapure water per day. For now, the water needed by semiconductor factories has been prioritized over agriculture and the problem has not gotten worse, but if the rains do not come hard, the chip manufacturing process could slow down.
heat and blackouts
Another risk is also related to the weather. This year is being especially hot in Taiwan, says Pang. The high temperatures are generating very high peaks in electricity consumption that have led to blackouts, specifically two in the past week. These blackouts, if prolonged, would also be a serious threat to semiconductor chip production in Taiwan.
The third risk is covid. After an impeccable management of the pandemic when the rest of the countries suffered, Taiwan is now suffering from what could lead to a lockdown. Pang says the restrictions would keep some dockers and other port personnel at home, putting shipments of semiconductor chips to the rest of the world at risk. Taiwan has only vaccinated 5.2% of its population and this past Wednesday, for example, the authorities reported the detection of 633 local covid-19 infections and eleven new deaths.
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These risks, if they materialized, would generate a sharp increase in the price of chips and would return us to five or six years ago as far as technology is concerned. Electronic goods would continue to be produced, but they would have fewer functions than they do today. “This situation could generate higher global inflation,” says Pang.
In the case of the US, the price of second-hand vehicles has skyrocketed due to the impact of the shortage of microchips, which has been the recipient of unusual excess demand. “This is due, above all, to car rental companies, which stopped buying new vehicles to renew their fleets, and are now forced to resort to second hand. Hertz, for example, is rebuilding its fleet after having reorganized its business, and the company now buys low-mileage used vehicles at auctions and dealerships, so the macro impact of the semiconductor imbalance in the auto industry is likely to be more visible to inflation CPI than for GDP growth,” say the experts at TS Securities.
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