Thought I would send a note with some thoughts on the chip shortages we are seeing that are effecting a wide range of products from cars to game consoles to appliances…
Why do we have shortages? Perfect storm of a structural increase in long-term demand and a short-term imbalance in the supply chain.
- Pandemic demand shift – demand increased for a wide range of semiconductor intensive products as the pandemic accelerated digital transformation and increased demand for electronics tied to from work/learn from home and for home appliances, TVs etc. Accelerated demand in many areas will have a long tail (e.g. 5G, IoT).
- Rapid demand recovery coupled w/ lean inventories – The auto industry is a perfect example of this. Heading into the pandemic, autos were already weak then Covid weakened demand further. The problem arose when demand suddenly picked up in Q4. The long and complex auto supply chain, w/ tight inventory mgmt., couldn’t respond to the demand swing quickly (particularly w/ increased semi demand from other places, see previous bullet)…from chip production to car production, it takes ~6 months with several tiers of suppliers in between.
- Stockpiling – there is inventory hoarding that is making a tight supply situation even worse, in part to ensure supply b/c of geopolitical tensions and in part in response to supply chain disruption due to Covid.
- Huawei, for example, began building up inventory to buffer themselves from US sanctions set to cut them off from key suppliers. Overall, China’s chip imports increased ~15% to ~$380B in 2020, up from $330B in 2019.
- Confluence of weather and disasters
- Semi manufacturing can be water intensive. Taiwan suffered its worst drought in decades…TSMC, one of the 3 largest foundries is located there.
- A plant in Japan that’s a major provider of automotive chips was damaged by fire in March.
- Weather related power outages at Texas facilities impacted TSMC auto chip supplies and Samsung SSD controllers for PCs.
What is it impacting?
- Shortages are particularly apparent in certain areas like lower end chips (like display IC’s and power mgmt. chips vs CPUs & GPUs), but the impact is pervasive b/c they go into a lot of stuff…laptops, webcams, printers, contactless payment equipment, TVs, air purifiers, cars, washer/dryer etc.
Implications?
- Tons of spending aimed at increasing semi manufacturing…including in mature nodes.
- Intel unveiled plans in March to spend $20B to build two new factories in Arizona.
- TSMC ramping its capex to $100B over the 3 yrs., including about $30B in 2021 (~80% of the 2021 capital budget will be allocated for advanced process technologies, including 3-nanometer, 5-nanometer, and 7-nanometer), from a record $17B last year.
- Samsung plans to spend $116B over the next decade to compete w/ TSMC.
- SMIC has plans for a $2.35B plant with funding from the city of Shenzhen.
- US, Europe and China are all being aggressive about building domestic capacity, aided by gov’t stimulus.
- Biden looks to spend $50B to support semiconductor manufacturing/research and may offer tax incentives for a proposed $12B TSMC plant in Arizona and a potential $17B Samsung facility in Texas.
- The EU has a goal to double chip production to 20% of the global market by 2030. They are looking for TSMC and Samsung to potentially build advanced semi fabs there.
- China has a 5 yr. plan that includes significant spending aimed at producing cutting-edge chips.
- Inflation – shortages are leading to higher prices. Goldman estimates that this could have a 3% impact on effected goods…chips are an important production input to ~12% of GDP…so they say this could boost inflation by 40bps…
- Delaying revenue – For example, the car industry expects a negative $61B impact this year and Apple said it would see a $3-4B revenue hit as it would impact availability of Macs and iPads.
- Capacity expansions increasing talk of next cycle – The semiconductor industry has cycles that are generally supply driven (though it is less cyclical than it used to be), so the massive increases in supply bode watching, particularly w/ mature nodes.
How long will it last?
- Opinions vary, but this could last into 2022, maybe 2023. The bottom line is that this is temporary as there are massive amounts of supply set to come on. Timeline also varies by type of chip. Massive amounts of supply are coming on that will alleviate this, but adding capacity takes time. TSMC forecast in April the shortages could extend into 2022, but said they would see some improvements next quarter.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$AAPL.US
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