The pandemic lockdowns across the world damaged the world’s supply chain and one of the biggest casualties was the semiconductor industry.
The coronavirus lockdowns have had a knock-on effect for many industries, but it has also damaged parts of the global supply chain. Trouble in the supply chain has seen a global shortage of semiconductors, which has hit the vehicle manufacturers.
For countries such as Germany, this is a big deal as the vehicle industry plays a big role in the economy and price rises being passed down the line have contributed to annual inflation in the country at 4.2%.
The semiconductor shortage was a combination of short-term and long-term factors in the supply and demand equation. When the pandemic happened, people pulled in their sales or they physically couldn’t keep production going. The vehicle manufacturing industry in particular saw temporary shortages. Meanwhile, everyone sitting around at home, they began buying new electrical goods. Computers, televisions, appliances and game consoles. When the vehicle industry came back around September, they had basically lost their place in the manufacturing queue to find chip supplies.
A new kind of semiconductor shortage
The semiconductor chip industry has seen many shortages before, but they usually are in a particular kind of product such as memory chips. This time it’s everything and it is another sign that demand has increased. The chips are being used in many different products today and with advanced technology, products such as a car or a smartphone is using more chips than ever before. The cars and mobile devices of tomorrow will maybe require more chips and it is an upward trajectory that has many manufacturers worried.
The other problem is that the industry is also highly centred around one company: TSMC in Taiwan. Most of the leading “fabless” semiconductor companies such as AMD, ARM, Broadcom, and Nvidia, are customers of TSMC.
Ramping up production is also not easy as the newest factories can cost US$10 billion, while older factories can struggle to find old machinery and parts in scale.
An example of the effects can be seen at General Motors, where sales were down 33 percent in the recent quarter. The automaker sold 446,997 vehicles, compared to 665,192 a year earlier. In the same quarter of 2019, GM sold 738,638 vehicles.
The outlook for 2022
Some industry executives have warned that the shortage will extend into 2022 and potentially beyond. The CEO of semiconductor company Marvell Technology, Matt Murphy said:
“Right now, every single end market for semiconductors is up simultaneously; I’ve been in this industry 27 years, I’ve never seen that happen”.
“If it stays business as usual, and everything’s up and to the right, this is going to be a very painful period, including in 2022 for the duration of the year.”
Several chip producers have announced plans to expand factory capacity, but as stated earlier in the article, that can take some time. Murphy, whose firm is also fabless and works with manufacturers on its designs, said, “that’s not going to kick in until 2023 and 2024 — so there’s this painful period.”
The CEO at rival American firm AMD, Lisa Su, agreed on a tough period ahead.
“We’ve always gone through cycles of ups and downs, where demand has exceeded supply or vice versa. This time, it’s different.”
Su said that the first half of 2022 will be “likely tight,” but the second half will be less severe as the manufacturing capacity increases.
“It might take, you know, 18 to 24 months to put on a new plant, and in some cases even longer than that. These investments were started perhaps a year ago.”
Intel is one of the companies that has plans to increase manufacturing, announcing in March that it would invest $20 billion in two new factories in Arizona.
TSMC is also investing in the state with a $12 billion factory and the company said it would invest $100 billion over the next three years to increase capacity.
Demand to decrease over the coming years?
With bottlenecks and slow capacity increase on the supply side, the industry could benefit from looser demand. It’s true that many of the personal computer and appliance upgrades were done with stimulus checks and as a means to improve home offices.
More than 300 million personal computers were sold in 2020, according to market intelligence firm IDC, which was up from 268 million in 2019.
That led to some analysts projecting upwards of 400 million PC sales in the coming years, but it is a sales trajectory that may not play out as consumers pare back spending. Rising taxation, inflation and energy prices could pop many consumer bubbles in the coming year.
Interestingly, the KPMG survey saw 53% of executives predicting that nationalism could be the threat to the industry in the next three years, with supply chains at 37%. There is also the issue with China and the fears that they may invade Taiwan. That could have serious repercussions for the semiconductor industry.
Conclusion
The coronavirus pandemic lockdowns upended the supply chain around the world and caused serious disruptions to the semiconductor industry. Rising demand from consumers pushed idled vehicle manufacturers to the back of the queue for chips and the result is a shortage of supply that could last into 2022.
The slow path to raising capacity means that supply cannot right the issues initially, but there is some hope that consumer trends were inflated by the lockdowns and the industry can find its feet once more. The path of inflation and taxation should also take some of the heat out of the demand from consumers.
While the large manufacturers are ramping up production, that may take 2023-24 to have a material effect, but there also fears over nationalism. The recent shortages may see defensive moves from governments, while the industry’s reliance on one Taiwanese firm is another threat.
By Kevin George