There has been a lot in the news lately about chip shortages impacting a number of industries. The auto industry has been prominently mentioned, but this shortage impacts a number of industries beyond autos. Chips are used in many different types of products across the entire spectrum of industries both here in the U.S. and globally.
Why is This Shortage Occurring?
Beyond automobiles, chips are a key component in smart phones, home appliances and many other consumer and industrial products.
Matt Bryson, Wedbush Equity Analyst, says, “Shortages are due in large part to COVID and supply chain management issues.” An example is the impact of the drought in Taiwan, where about two-thirds of the world’s supply of semiconductors are manufactured. The drought has limited the ability to make the chips as the manufacturing process requires a large amount of water.
Industries the Shortage Is Impacting
Bryson says, “Automobiles are a small portion of the chip industry, but inventory reductions at the beginning of COVID combined with a snapback in auto demand has created a severe shortage in this space. The impact has been magnified by the relatively high price of autos compared to the limited dollar value of the chips used in most vehicles.”
He adds, “The shortage in autos is being exacerbated by the increased need for chips as vehicles are becoming more computerized.” An example of the impact on the auto industry is illustrated by the recent pause in manufacturing by a Hyundai plant in Alabama due to a shortage of chips. (1)
Beyond the automobile industry, Bryson cites a number of industries where the impact is being felt, including:
Gaming console makers are facing a major crunch. Demand took off due to both new product launches as well as increased consumer behavior due to COVID. While supply constraints around AMD parts is a factor, Nintendo’s struggle with supply chain constraints illustrates the issues gaming manufacturers are having sourcing commodity chips that are impacting the rest of the supply chain.
- Gaming console makers are facing a major crunch. Demand took off due to both new product launches as well as increased consumer behavior due to COVID. While supply constraints around AMD parts is a factor, Nintendo’s struggle with supply chain constraints illustrates the issues gaming manufacturers are having sourcing commodity chips that are impacting the rest of the supply chain.
- Consumer requirements for PCs to support changing work, education and recreational needs (due to COVID) have created a spike in demand in this segment. Manufacturers are still struggling to meet demand due to shortages across a wide range of chips.
- Handsets, the demand for smartphones hasn’t lifted as significant as in other areas, the shift to 5G has increased the semiconductor content within handsets considerably, also creating an additional area of demand that is taxing the ability of foundries to produce.
Bryson says, “The fact that Apple has publicly indicated that supply chain constraints will affect its ability to ship certain products is perhaps the best indication of how severe these constraints are given Apple’s superior supply chain management capabilities.”
Bryson adds, “The impact of lower supply is lifting production costs, but in many cases the impact is limited with the exception of products with significant memory requirements (DRAM and NAND). However, the resulting scarcity of supply, in the auto industry for example, is creating a sellers’ market allowing manufacturers/distributors to charge premium pricing and lifting consumer costs.”
Biden Administration’s Response to the Shortages
The Biden Administration’s infrastructure package contains funding for domestic semiconductor manufacturing, as well as significant technology enhancements including a broad expansion of broadband availability. The Senate recently passed a large science and technology bill that includes $52 billion in funding for the U.S. semiconductor industry as well as funding for other related scientific initiatives. (2)
Semiconductor giant Intel has put forth a plan to spend $20 billion to build new factories that could help address the chip shortage both in the U.S. and globally. While their CEO has indicated that much of this added production would remain in-house, they would also be working to supply customers such as Apple and Qualcomm, among others. (3)
Investors will want to monitor the chip supply situation both in terms of end-user companies impacted by supply issues, and for the impact on chip suppliers.
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