Lack of foresight, sudden changes in demand, a rigid and highly concentrated industry… The factors that have been able to cause the current shortage of semiconductor chips (integrated circuits) are many and the solution will not come quickly. What began as a momentary mismatch between supply and demand at the end of last year could now last until 2022, generating interruptions in supply chains, paralyzing factories, pushing up prices and subtracting a few tenths of growth from the recovery of the global economy.
In a matter of months, chips have become as scarce as gold, say Rico Luman and Timme Spakman, analysts at ING in an industry report on chips. Right now, half the world is looking at Taiwan and South Korea, the big producers of semiconductor chips that can’t keep up with demand. The latest victims of this shortage could be the , where the management has proposed to the unions the application of an Erte until September 30 due to the semiconductor crisis.
For this reason, companies and governments are looking for solutions, such as trying to produce their own chips (semiconductors), something that could take years, if these plans are finally implemented. Semiconductors seem destined to become the gold or oil of this new era, industrial revolution or whatever you want to call it.
Today, production is highly concentrated in East Asia. Although American companies like Qualcomm or Intel are the most famous when it comes to microchips, the truth is that these firms are the ones that develop and sell them, but manufacturing and assembly is carried out, above all, in Taiwan and South Korea. South (TSMC, Samsung…), where the chip industry is saturated by the sudden boom in global demand.
From the financial firm TS Lombard they explained in a paper that manufacturing has moved to Asia enough to account for the global production of chips for processors and 70% of the production of memory chips. The region’s leadership will continue to expand with the increasing capital and technical intensity needed for future semiconductor production.
Why does this shortage occur?
The current shortage is difficult to solve in the short term, since investment in the chip industry does not pay off overnight, because it is a very capital-intensive industry (machinery), which requires significant investment to grow and that requires qualified personnel. On the other hand, demand has increased due to cyclical factors (economic recovery and greater demand for electronic products during covid), but also due to structural factors, since an increasing number of products carry a microchip.
ING experts explain that “computer chips are in short supply due to a sudden increase in demand related to covid-19. This demand shock is mainly caused by consumers who cannot spend money on services such as restaurants and travel and who are now spending more on electronics. However, strong demand for work-from-home office equipment and a faster-than-expected recovery in several sectors aren’t helping either.”
These experts recall that all of the above has been added to the fact that they are being implemented and the increased demand for new smartphones compatible with these networks. It has also played against the growing demand for computers and graphics cards for the .
Beyond the demand side, the situation on the supply side has not been easy either. First, with the covid crisis, chip manufacturers planned for lower demand, as a result of the economic crisis itself, which in principle should have affected consumption broadly, also reducing sales of electronic devices. On the other hand, when the industry managed to operate at maximum capacity, breakdowns in four facilities in Texas due to extreme cold and a fire in the Renesas Naka factory north of Tokyo worsened the situation for the second quarter, aggravating and prolonging chip shortage.
The demand for chips will not stop growing in the coming years
However, behind all these factors of demand and supply that are generating the shortage of semiconductors, there is another structural trend that really matters in the long term: every day more and more products are going to have a chip.
“The market is expected to return to double-digit growth in 2021. Many devices that used to be completely analog are now digital and supported by integrated circuits (chips). For example, smart thermostats or light bulbs compatible with systems home devices contain significant computational power to support their functionality and digital connectivity,” ING experts add.
On the other hand, cars and trucks also require an increasing number of semiconductors as advanced driver assistance systems (and on-board computers) expand. Some car factories have had to stop production due to lack of chips that help control braking through sensors “Increased production of electric vehicles and future steps in autonomous driving will further drive demand,” ING analysts say.
When will normality return?
What at first seemed like a temporary imbalance has been getting worse. The demand for electronic devices has not stopped increasing and the chip industry needs to grow to supply the world with this new ‘gold’.
Chipmakers are investing, but expanding a chip factory is not as easy as opening a bar or a hair salon, producing the machinery they work with takes time. The Taiwanese company TSMC has increased capital spending this year to 28,000 million dollars, about 11,000 million more than in 2020, as revealed by ING. In addition, the company is considering a long-term investment plan that could be around 100,000 million in the coming years to increase its production capacity.
Samsung also plans to increase spending on physical capital related to semiconductors by 20% to $31 billion. “Although these high investments will allow supply to catch up, this takes time and will not be of much help this year.” So there will still be a shortage and chip prices will go up for a while.
From ING they believe that the situation will not be resolved in a clear and sustainable way until 2022. However, the most acute shortage of some types of chip could be resolved in the second half of the year. Still, semiconductor manufacturing lines will continue to run at 100% capacity for years to come, making the industry sensitive to future supply or demand shocks.
How does it affect the economy?
In a broad way, it is being possible to see how the shortage of chips is affecting, especially in economies that are more intensive in industries that need the types of chip that are most scarce. Although it seems that those that are more scarce in recent months.
The automobile industry has been particularly affected, in part, by the strong volatility in car demand in recent months. “When car production plunged 40% in the early days of the pandemic, many orders for auto parts, including semiconductors, were cancelled. As demand for semiconductors recovered faster than expected, production capacity was already had been assigned to other clients in the industry,” say Rico Luman and Timme Spakman.
Chip shortages are to blame for about a million fewer cars being produced in the first quarter of 2021, according to IHS Market. That figure represents around 5% of the total quarterly production. However, global production is beginning to recover, but it will be difficult for carmakers to keep up with demand while semiconductors remain a scarce commodity. It’s not just car factories, game console and smartphone vendors that are having real trouble meeting demand for their products due to a shortage of semiconductors.
Splitting the globe, “the impact will be felt more in countries with a relatively large dependency, such as Germany. In addition, automotive parts suppliers will also see production cuts.”
Electronics companies are also grappling with these issues, but compared to automakers they appear to be in a better contractual position. However, Samsung itself, one of the big chip manufacturers, announced a few weeks ago that it was almost giving up the new Galaxy Note model due to the lack of chips.
Without chips for everyone, the production of vehicles, appliances or mobile phones will be lower. This will have an impact on consumers, who will not have an easy time fulfilling all their ‘wishes’ or will have to wait to make them come true. In addition, the prices of products that use microchips could rise if the shortage continues. Last but not least, all factories being forced to reduce their production will suffer a negative impact on their accounts that will affect shareholders, employees and future investment capacity, that is, economic growth. A good example, unfortunately, is the Erte proposed by Renault in Spain.
Facebook Comments
Disqus