Semiconductor chips are a key component of modern electronics and can be found in thousands of products that are used on a daily basis, including automobiles, computers, smartphones, appliances, gaming hardware and medical equipment. These chips are the brains of all electronics and perform different functions that range from standard repetitive routines such as memory and processing to complex tasks such as artificial intelligence, machine learning and high-end graphics.
At present, there is a global shortage of semi-conductor chips brought on by a myriad of factors, including the pandemic. This shortage has negatively impacted the production of goods, from smartphones to gaming consoles and automobiles. In response to growing concerns about the chip shortage and its consequences on the US industries, President Joe Biden signed an executive order in February 2021 which entailed a 100-day review of supply chains for critical products, including minerals, semiconductors, large capacity batteries and Active Pharmaceutical Ingredients (APIs).
Causes of the global chip shortage
The Covid-19 pandemic in early 2020 fuelled a decline in the demand for new cars as few people were travelling and confidence in the economy was low; that caused automakers to reduce production and chip purchases. On the other hand, the demand for electronic devices and home office items such as laptops, gaming consoles and smartphones surged to accommodate working from home, entertainment and virtual learning due to the lockdown measures implemented to curb the infection rate.
To meet the increased demand for such items, chip manufacturers redirected their processes into smartphone, laptop and tablet chips instead of car components. With the rollout of the Covid-19 vaccine in the latter half of 2020 and the anticipated return to some level of normalcy, automakers started to ramp up production and demand for semiconductor chips ultimately increased at a faster pace than expected. Unfortunately, the supply of semiconductor chips has not been able to catch up with rising demand as semiconductor factories have limited capacity, along with a manufacturing lead time of 26 weeks.
Impact on key US industries
The automobile industry continues to be the sector hardest hit by the shortage in semiconductor chips. It is estimated that the average car has around 50 to 150 chips which are used to make vehicles smarter, safer and more efficient. Semiconductors have become an increasingly critical component for automotive manufacturers as they add more electronic features to vehicles. Operations at international car manufacturers, including Honda, Volkswagen and Toyota, have been affected with several companies temporarily shutting down operations on certain models due to the lack of semiconductors.
Electronics producers such as Sony who produce game consoles have struggled with stock shortages in 2020 and indicated that sales targets for the new PS5 this year may not be achieved because of the semiconductor supply issue. Microsoft who produces the Xbox, anticipated that supply issues may continue up to the second half of 2021.
Impact on consumers and outlook
Consumers are facing rising prices and shortages of their favourite products that require chips. Both Ford and General Motors announced that they will produce fewer cars and trucks in the first half of the year because of the shortage. Sony’s production target for PS5 game consoles may not be met, Microsoft is cutting back production of its Xbox Series X, while Samsung, the world’s second-largest buyer of chips, is considering delaying the launch of its Galaxy Note phone.
The shortage is expected to last for some time, exacerbated by rising demand as economic activity picks up with the administering of the Covid-19 vaccine, the stimulus relief package and the production of more electric vehicles. Broadcom – the US chip maker says 90 per cent of its 2021 output is already accounted for.
It may be wise to reduce exposure to the sectors that rely on semiconductor chips and increase exposure to the chip industry. For the past earnings season, nearly all chip makers not only beat financial estimates, but topped forecasts. The Semiconductor Industry Association (SIA) in early March announced that global semiconductor industry sales were $40.0 billion for the month of January 2021 representing an increase of 13.2 per cent over January 2020 and 1.0 per cent over the December 2020 total. While a direct position in a stock may be held, an indirect position through a semiconductor mutual fund or exchange-traded fund can also be taken.
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