The shortage of semiconductors has been making headlines for the past few months, impacting everything from gadget companies to automakers. Why is there a chip shortage globally?
Whenever there's a shortage of anything, it can be a function of either demand or supply. At times, only one side of the equation is disturbed. The situation gets more complicated when there's pressure from both sides, as we see with semiconductors now.
Why are chips high in demand?
Thanks to the digital transformation, superphone supercycle, and booming global economy, gadget sales are rising, meaning more demand for chips. To further fuel that demand, global automotive production has been strong. Vehicles are getting smarter and a lot of them come with autonomous features, meaning more chips per car. The same goes for smart gadgets, which use more chips than normal gadgets.
HP perfectly summed up the chip supply situation during its fiscal 2021 third-quarter earnings release. The PC maker said that it sells everything it produces and that it could have sold more if not for chip shortage. This is a severe supply-demand mismatch.
Why are chips short in supply?
The COVID-19 pandemic severely impacted the global supply chain, as many chipmakers' factories were closed during the pandemic. And even as the plants reopen, there are labor shortages and a structural supply shortfall. While chipmakers have invested billions to build new foundries, they won’t come online before 2022.
There have also been repeat COVID-19 outbreaks in Malaysia and Taiwan, prompting production facilities to close again. The winter storms in Texas and a fire at Japan’s Renesas plant, which produces one-third of automakers' chips, didn’t help, either.
Why is the automotive sector the worst affected by the chip shortage?
During the peak of the pandemic last year, several carmakers canceled orders for chips, expecting sales to be weak for a long time. CSIS Strategic Technologies Program director James Lewis believes that was a “bad decision”—though to be fair, no one would have expected demand to recover so soon.
How much will the chip shortage cost the automotive industry?
Consulting firm AlixPartners said in May 2021 that the automotive industry will lose $110 billion in 2021 revenue due to the chip shortage. In the U.S. alone, it's estimated that almost 2 million fewer cars will be produced in 2021 due to the chip shortage.
Goldman Sachs chip shortage stocks to buy?
In August, Goldman Sachs identified six semiconductor stocks as “buys” amid the chip shortage situation. These are
- United Microelectronics
- Novatek Microelectronics
Meanwhile, Micron expects the chip shortage situation to extend into 2022, and to worsen the situation, in the medium term, the new foundries could create a structural oversupply situation. For now, it looks like companies will just need to get their hands on every chip they can find.