Chip Shortage: Causes and Effects Explained

Your capital is at risk if you invest. You could lose all your investment.
Please see the full risk warning here.
Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Laymen news-watchers might have seen the term “global chip shortage” being attributed to a variety of performance issues in a variety of companies. A “chip shortage”, also referred to as “semiconductor shortage” or “chip famine”, is a phenomenon in the integrated circuit industry, when demand for silicon chips outstrips supply.

With this article, we seek to provide a quick overview behind this phenomenon and how it affects some of the hottest stocks underpinning our products.

Root Causes

The manufacturing of semiconductors used to be a fairly distributed sector, with the US and Europe accounting for more 70% of all production. Since then, however, almost three-quarters of all production have moved to Asia.

This highly-concentrated scenario was heavily impacted by the pandemic: mandated lockdowns ushered in across Asia to combat the Covid-19 outbreak caused disruptions in the supply chains and logistics systems chipmakers depended upon to maintain production. On the other hand, since people began spending more time at home, there was a boom in demand for consumer electronics such as game consoles, smart TVs and laptops.

It bears noting, though, that this crisis was not solely due to the pandemic. It had been forecasted for quite some time that a shortage was in the cards since developing economies continued to ramp up consumption of electronics over the past decade.

Europe accounts for less than 10% of global chip production, although that is up from 6% five years ago. The European Commission wants to boost that figure to 20% and is exploring its intentions to invest 20-30 billion euros reach this target. While Intel has expressed interest in establishing a factory in Europe, it reportedly wants 8 billion euros in public subsidies in return.

The U.S. in particular has been hit hard by the shift in production: it has been increasingly more dependent on Chinese imports to satisfy its chip needs while its demand has consistently risen. Simultaneously, Chinese chip imports face increasingly stringent sanctions since the US government maintains that Chinese chip production in China has primarily military purposes.

To satisfy domestic demands, Intel announced in March that it intends to spend $20 billion on two new chip plants in Arizona, which would come online in the next 2-3 years.

With at least 1,400 chips needed per modern automobile, it was bound to impact car production. The current chip shortage is estimated to have caused a loss in production of nearly 4 million vehicles globally for 2021 alone. The problem is exacerbated by another issue: car manufacturers don’t use the most advanced — or “bleeding edge” — chips. Since the older chips are made using older manufacturing processes and chipmakers are moving towards producing higher-revenue “bleeding edge” products, filling orders from car makers would get pushed to the back of the queue.

In terms of “total” chip manufacturing leadership, the market is highly fragmented. However, Samsung and TSMC are the leaders in this field.

To highlight the difference brought about by bleeding edge products, around 55% of the world’s chipmaker revenues in the last quarter were generated by one Taiwanese chipmaker: Taiwan Semiconductor Manufacturing Corp (TSMC), which committed to as much as $28 billion in capital spending in 2021. TSMC’s growth in market space is largely driven, in recent times, to orders from AMD, MediaTek, Qualcomm and Bitmain’s cryptocurrency mining machines. There has been very little reshuffling in the Top 10 chip maker list over the past several years.
Interestingly, top chipmakers are frequently not the top choices as suppliers for car manufacturers. In 2019-2020, Infineon, NXP, and Renesas were the leading suppliers in this highly-fragmented supplier space estimated to be (then) worth around $35 billion.
The estimated impact among US car models has been quite profound: Ford, Jeep and Chevrolet have announced cutbacks in production of well over half a million vehicles as of now.
Highlighting how crucial and well-anticipated this situation was is also evident in stock market behaviour: the Semiconductor Index (SOX) had steadily begun to outperform both the S&P 500 Tech Sector since November last year.

Consequences for Tesla, AMD and NVIDIA

Consulting firm Alix Partners announced that automakers will face the major brunt of the chip shortage, with the industry estimated to lose about $110 billion of sales this year on account of lost production. Adding further woes to this was Intel CEO Pat Gelsinger’s claim that the work and study-from-home trends during the pandemic have led to a huge strain on global supply chains.

During the earnings call in April, Tesla CEO Elon Musk likened the crisis to the toilet paper shortage that had affected many American states during the early outbreak of Covid-19 in the U.S., opining that manufacturers are ordering more microcontrollers than what they actually need. Citing global supply chain pressures, Tesla has repeatedly hiked the price of its Tesla 3 and China-built Model Y models over the past few months.

With both TSMC and Intel warning that chip supply issues could last through 2022, Nvidia stated that it expects demand for its new RTX 30-series GPU to outstrip supply for the same time period during an investors call in April. The company was also well underway to challenge Intel’s dominance in the chip maker space by announcing plans to acquire Arm Limited from SoftBank for $40 billion as well as Xilinx a $35 billion all-stock transaction in Q4 2020.

While AMD CEO Lisa Su gave a more measured response to the crisis in May by saying that the chip shortage was part of a “megacycle” and assuring investors that the industry is “really good at managing these things”, she also announced that the company would be prioritising higher-end commercial and gaming SKUs (Stock Keeping Units) over lower-end CPU components.

Micron Technology reported during its fiscal 2021 Q2 update that it’s operating near full capacity to keep up with its customers’ needs due to surging demand for electronic devices. It estimates that tight supplies of DRAM memory chips (a staple feature in most smartphones, gaming consoles, etc.) coupled with strong demand would cause the semiconductor industry to fall short on filling orders for DRAM throughout 2021 and possibly beyond. It bears noting that over 70% of the company’s business in Q2 came from DRAM memory alone.

It further streamlined its operations by buying out Intel’s 49% stake in its 3D XPoint (a new type of architecture for memory chips) joint venture to end a $400 million-a-year drag on its profits. Micron’s Utah plant that made these chips is scheduled to be sold.

In Conclusion

The chip shortage has foisted a peculiar conundrum on the auto industry: while Tesla might be pricier and possibly affected in its production targets, other carmakers are similarly affected (if not worse) and thus unable to capitalize on its shortfall. NVIDIA and AMD, on the other hand, are moving to benefit from more-expensive products in their respective catalogues under their confident estimation that sales will leave them with very low levels of unsold stock, owing to a shortage in cheaper alternative in the consumer electronics space.

If Tesla remains unaffected by virtue of everybody else being affected too, the company’s stock performance will likely not have the chip shortage be a huge factor. If consumers will purchase consumer electronics regardless of the higher prices being command, NVIDIA and AMD will do well.

If, however, other economic conditions such as inflation, job loss, reduced spending trends, etc. seep into the equation over the course of the year, all three companies will be affected, as will their peers. On the question of whether these companies will do well relative to their peers, your guess is as good as ours.

References:

  1. Global chip shortage costs automotive sector €90 billion, Consultancy.eu
  2. Yes, the global microchip shortage is COVID’s fault. No, it won’t end any time soon, The Conversation
  3. Chip Shortage Causes AMD to Pivot Away From Lower-End PC Processors, PCMag
  4. Nvidia warns the great GPU shortage will continue throughout 2021, The Verge

Your capital is at risk if you invest. You could lose all your investment.
Please see the full risk warning here.

Education Series: Single-Stock ETPs

Authored by

Sandeep Rao

Share this:

Share on facebook
Share on twitter
Share on xing
Share on whatsapp
Share on telegram
Share on email

Related Posts

Search

Search
Generic filters
Exact matches only
Search in title
Search in content
Search in excerpt
Filter by Categories
AAPL
AMD
AMZN
BA
BABA
BARC
BP
C
CRM
Education
ETPs
FB
Featured
GOOG
GS
HSBC
HSBC
In the press
Insight
Insights
JPM
Market Insights
MSFT
MU
NFLX
NVDA
PYPL
RDS
Research
Research
SHOP
SQ
TSLA
TWTR
UBER
Uncategorized
Uncategorized
Uncategorized
Uncategorized
V
VOD
Websim
ZM

Welcome to Leverage Shares

Terms and Conditions

Notice

If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.

If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.

Risk Warnings

The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.

This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.

Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.

This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.

United States Visitors

The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.

Persons accessing this website in the European Economic Area

Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).

Exclusion of Liability

Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.

Leverage Investment

Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.

Cookies

Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.

This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2. The contents of this website have been approved under S21 of the Financial Services and Markets Act 2000 by Resolution Compliance Limited. Resolution Compliance Limited is authorised and regulated by the Financial Conduct Authority (FRN 574048).

By clicking you agree to the Terms and Conditions displayed.