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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.
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.
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.
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.
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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