Semiconductor shortage is getting worse
With news suggesting that the semiconductor shortage is getting worse, investors are asking what it may mean for semiconductor companies and their shareholders.
The time lag between companies ordering and receiving semiconductors increased to 21 weeks in August according to data from Susquehanna Financial Group. This was up from 20 weeks in July, making wait times the longest on record.
The Long Wait For Chips
The gap between ordering a chip and delivery is still growing
Source: Susquehanna Financial Group
Car makers have been the hardest hit. Electric cars are surging in popularity, meaning car makers are hungrier for chips than ever. Electric cars use more chips than their combustion engine counterparts. Yet, more than seven million cars that were supposed to be made this year have been cancelled, and many production lines have been closed due to the chip shortage, according to IHS Markit.
The worsening shortage is raising questions about how long it will last, and whether the root causes can be addressed.
Chip shortage: the root causes
The root cause of the semiconductor shortage is a classic supply-demand mismatch. Presently, demand for semiconductors is surging while supply is relatively flat. What caused the mismatch? A combination of Covid, electric cars, cryptocurrency and the fact that semiconductor factories are very hard to build.
When Covid-19 began to spread globally, people stayed home for work and entertainment. This inevitably meant people bought more electric goods. More computers, phones and laptops were purchased to enable remote work. Additionally, more video game consoles, gaming components and the like were bought to people so that they could entertain themselves from home.
Semiconductors have strongly outperformed
Source: Solactive, S&P Global, data as of 1 June 2021
At the same time as Covid-19 hit, electric vehicles hit a tipping point. Tesla’s share price began to rocket as the company’s sales grew over 50% a year. Seeing how Tesla was electrifying the market (pun intended), other car makers like Ford and General Motors began to follow suit.
Then adding to all this, cryptocurrencies began booming. Cryptocurrencies make extensive use of semiconductors as they are needed to power the “rigs” that run the crypto networks.
Supply stayed flat
Yet semiconductor supply could not be increased to meet the demand. Semiconductor factories – called “foundries” – cost billions of dollars and take several years to build. Why do they take so long and cost so much? Because foundries are extremely complex to build.
In foundries, the air must be so pure that you cannot breathe it, as dust particles ruin the chips. The airflow must be almost perfectly controlled as bad airflow can contaminate chips. Backup electricity sources must be installed so that power cuts don’t ruin production. Workers must be highly trained as making semiconductors is extremely specialised. The machinery required at these factories is also incredibly expensive and takes time to build. This, again, means increasing supply takes time.
When will it end?
No one knows when the semiconductor shortage will end. Especially as this is a complex industry, with some parts hit harder than others. The hardest hit by all counts have been car makers as the type of chips they require were supply-constrained even before Covid-19. Well-placed sources such as Intel, one of the largest semiconductor companies, and Ford, which has placed significant chip orders, suggest car makers could still be feeling the sting into 2024.
Yet even under a best-case scenario, it is unlikely that supply will rise before 2023 many experts believe. If only because of the time it takes years to build foundries and could take years to overcome the current labour shortage.
What does it mean for investors?
The ongoing shortage has naturally caused investors to ask what it means for them. So far, at least, the semiconductor shortage has been good news for investors.
Share prices of semiconductor businesses have surged over the past 12 months, driven up by the supply shortage. It is logical that they would: with demand surging and industry revenue climbing. According to data from the lobby group the Semiconductor Industry Association, monthly sales in June 2021 hit US$44.5 billion, up 29.2% from June 2020.
Semiconductor industry sales worldwide 1987-2022
Source: WSTS Semiconductor Market Forecast Spring 2021
Due to the supply shortage, semiconductor prices have begun to rise. Price rises are visible everywhere, from retailers increasing the price of graphics cards in their shops, to the fees that foundries like TSMC charge to make chips. These price increases will likely boost industry revenue further.
While the future is unknown, the ongoing supply shortage suggests that semiconductor investors are well-placed. Investors wanting to participate can do so via the ETFS Semiconductor ETF (ASX Code: SEMI), the only semiconductor ETF in Australia.