Chip Shortage: Causes and Effects Explained

Upcoming Earnings

Learn More

NEW on Borsa Italiana

Learn More

NEW on LSE: Copper ETC WTI Oil ETC Brent Oil ETC Natural Gas ETC

NEW on Borsa Italiana: -3x NVDA -3x NIO 3x UBER 3x AMD -3x BABA 3x NFLX -3x COIN FAANG+

Announcement: New ETPs on XETRA New ETPs on XETRA

Rendimiento Tickers Índicie Tarifas Estructura Fiscal y Jurídico Servicios Claves Documentos Avisos

Chip Shortage: Causes and Effects Explained

MARKET INSIGHTS
21 Jun 2021

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

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:

Global chip shortage costs automotive sector €90 billion, Consultancy.eu
Yes, the global microchip shortage is COVID’s fault. No, it won’t end any time soon, The Conversation
Chip Shortage Causes AMD to Pivot Away From Lower-End PC Processors, PCMag
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.

Leverage Shares ETPs

Introducing Our Single-Stock ETPs

Short and Leveraged ETPs Explained

Rebalancing and Compounding

Six Things To Know About Our ETPs

A Built-in Airbag to Limit Losses

Elaborado por

Sandeep Rao

junio 21, 2021

Category: MARKET INSIGHTS

Post correlati

MARKET INSIGHTS

Nov 27, 2023

S&P 500 melt-up

Fed’s potential rate cuts, boost sentiment. Possible market correction.

MARKET INSIGHTS

Nov 27, 2023

S&P 500 melt-up

Fed’s potential rate cuts, boost sentiment. Possible market correction.

Boyan Girginov

MARKET INSIGHTS

27 Nov 2023

S&P 500 melt-up

Fed’s potential rate cuts, boost sentiment. Possible market correction.

27 Nov 2023

S&P 500 melt-up

Fed’s potential rate cuts, boost sentiment. Possible market correction.

MARKET INSIGHTS

27 Nov 2023

S&P 500 melt-up

Fed’s potential rate cuts, boost sentiment. Possible market correction.

MARKET INSIGHTS

Nov 22, 2023

Nvidia delivers, but stock nosedives

Nvidia beat estimates but missed the high end of analyst forecasts. Warns of Q4 headwinds.

MARKET INSIGHTS

Nov 22, 2023

Nvidia delivers, but stock nosedives

Nvidia beat estimates but missed the high end of analyst forecasts. Warns of Q4 headwinds.

Boyan Girginov

MARKET INSIGHTS

22 Nov 2023

Nvidia delivers, but stock nosedives

Nvidia beat estimates but missed the high end of analyst forecasts. Warns of Q4 headwinds.

22 Nov 2023

Nvidia delivers, but stock nosedives

Nvidia beat estimates but missed the high end of analyst forecasts. Warns of Q4 headwinds.

MARKET INSIGHTS

22 Nov 2023

Nvidia delivers, but stock nosedives

Nvidia beat estimates but missed the high end of analyst forecasts. Warns of Q4 headwinds.

MARKET INSIGHTS

Nov 22, 2023

Opportunity in Bonds

Peak in rates opportunity to get into bonds.

MARKET INSIGHTS

Nov 22, 2023

Opportunity in Bonds

Peak in rates opportunity to get into bonds.

Boyan Girginov

MARKET INSIGHTS

22 Nov 2023

Opportunity in Bonds

Peak in rates opportunity to get into bonds.

22 Nov 2023

Opportunity in Bonds

Peak in rates opportunity to get into bonds.

MARKET INSIGHTS

22 Nov 2023

Opportunity in Bonds

Peak in rates opportunity to get into bonds.