Semiconductor shortage guide: Winners and losers of crisis
The Covid-19 pandemic brought with it a host of problems and the ongoing global semiconductor shortage is one of its most disruptive side effects.
Industry experts and analysts have described the semiconductor chip shortage to be the result of a “perfect storm”. Essentially, this global phenomenon is a story of supply being unable to meet surging demand, due to various factors, including increased digitalisation of the world, strong demand for consumer electronics and pandemic-related supply chain issues.
However, there is more to the situation than meets the eye, because few winners have emerged from the semiconductor crisis and it’s at the expense of a plethora of losers. In this article, we will look at the causes of the electronic chip shortage, the winners and losers, and when the crisis is expected to end.
Global semiconductor shortage explained: By-product of Covid-19
The digitisation of industries was well under way before the pandemic. Demand for semiconductors was rising as cars became more reliant on software, homes embraced smart devices, factories welcomed automation, telecoms evolved to 5G technology and cloud computing became the backbone of the digital world.
The US Department of Commerce described the ongoing semiconductor industry shortage as being due to a “perfect storm of factors” and said the emergence of the Covid-19 pandemic exacerbated these trends by dramatically increasing demand for products that require semiconductors of all types.
As nations went into lockdown in 2020, demand for consumer electronic goods, especially laptops, smartphones and gaming consoles, skyrocketed due to several factors, including working from home, online schooling, increased disposable income and boredom.
A thriving cryptocurrency community also added to the increased demand for semiconductor chips. Miners of proof-of-work blockchains, such as Bitcoin and Ethereum (migrating soon to proof-of-stake), use GPU (graphics processing unit) and ASIC (application-specific integrated circuit) semiconductor chips to mine bitcoin (BTC) and ether (ETH). Proof-of-stake networks, meanwhile, such as Cardano (ADA), enable holders to stake native cryptocurrency tokens from their personal computers (PCs), laptops and smartphones.
As a result, global semiconductor sales jumped more than 25% year on year in 2021 to their highest annual turnover ever at over $555.9bn, while PC sales saw their best year in nearly a decade.
Consumer electronics manufacturers could have enjoyed better sales if it weren’t for the chip shortage. Companies were unable to scale output due to bottlenecks in the multiple-step semiconductor manufacturing process, as factories in labour-intensive assembly and testing hubs in Southeast Asia were forced to close due to multiple Covid-19 waves.
Increasing output to ease the shortage was almost impossible for chipmakers, as Deloitte explained:
Losers: Automobiles, consumer tech
The hardship faced by the automobile industry because of the chip shortage has been widely documented. Research firm IHS Markit forecast that up to 7.1 million vehicles would be lost globally due to the semiconductor supply chain disruption in 2021.
Going forward, the research firm said that semiconductor shortages will still remain the “single most influential feature” as it forecast new light vehicle sales to post a weak growth of 3.7% year on year in 2021.
Market expectations are that the global shortage of semiconductors could linger well into 2022 and 2023. New problems are emerging for the automobile industry as scarcity moves from different variants of semiconductor chips. IHS Markit now expects analogue chips to become the main constraint for vehicle production for the next three years, just as supply constraints ease for microcontrollers (MCU).
Analogue chip supply tightness is expected to become apparent towards the end of 2023 or early 2024, as the average number of analogue chips used per vehicle increases, driven by trends such as electrification and advanced driver-assistance systems (ADAS) features, IHS Markit added.
On 14 February 2022, Toyota (TM), the world’s top-selling carmaker, slashed its monthly production forecast yet again. The Japanese automobile major reduced its production plan by 100,000 units globally for March, having already cut its production forecast by 500,000 units for the upcoming quarter.
Elsewhere, CNBC reported that electric vehicle bellwether Tesla (TSLA) has decided to remove two electronic units from its Model 3 and Model Y cars to deal with the chip crisis.
Shortage of semiconductors for gaming console makers
In the consumer electronics sector, gaming console manufacturers including Sony (SONY), Microsoft (MSFT) and Nintendo (NTDOY) have been particularly hard hit.
Customers have complained about not being able to get their hands on Sony’s latest flagship console the PlayStation 5 (PS5) since its release in November 2020. In its latest earnings results, Sony cut its FY21 unit sales forecast for the PS5, blaming the semiconductor shortages and global distribution supply chain problems.
Pokemon series video game publisher Nintendo echoed a similar message by slashing its Nintendo Switch hardware sales forecast by one million units for the full year ended 31 March 2022. Nintendo also reported a 21.4% year-on-year drop in gaming console sales for the nine months ended 31 December 2021, despite its Switch OLED model currently being one of the most popular gaming consoles.
With similar reports of Microsoft's latest Xbox Series X being hard to find in store and online, manufacturers are just not being able to meet strong demand for gaming consoles, due to production constraints.
Winners: Top semiconductor stocks
The obvious winners from the global semiconductor shortages have been the chipmaking companies. Governments have also recognised the economic and technological importance of the semiconductor industry and are promoting chip manufacturing locally.
US President Joe Biden has proposed an allocation of $50bn to enhance domestic semiconductor production, while China has labelled semiconductor technology as a strategic technological priority and has passed favourable policies for the sector, including a 10-year corporate tax exemption for semiconductor manufacturers and investment plans of over $150bn until 2030.
Taiwan Semiconductor Manufacturing Company (TSMC), the world’s second-largest semiconductor company by market capitalisation (as of 16 February), is arguably one of the winners of the global semiconductor crisis. In its recent quarterly earnings, the company reported a year-on-year jump of more than 21% to NT$438.19 ($15.74bn) for the fourth quarter as the company beat analyst expectations, while full-year revenue surged nearly 25% year on year to $57bn in 2021.
TSMC is bullish on the growth prospects for the semiconductor industry. The sector leader expects capital expenditure of between $40bn and $44bn in 2022, having spent $30bn in 2020 to capitalise on strong demand for its manufacturing capabilities. The world’s largest contract chipmaker has forecast the overall semiconductor market (excluding memory) to grow about 9% and it sees the foundry industry posting a strong 20% growth in 2022.
US-based Nvidia (NVDA) is the largest semiconductor firm globally in terms of market capitalisation, according to CompaniesMarketCap, as of 16 February. Its stock has gained over 800% in the last five years as demand for its chips surged on the back of a booming gaming sector and for cryptocurrency mining uses.
In November, the semiconductor chip designer posted record quarterly revenue of $7.1bn, up 50% compared to a year ago. Nvidia said its Nvidia Drive Orin chip is being used by autonomous truck company Kodiak Robotics, automaker Lotus, autonomous driving-solutions provider QCraft and EV startup WM Motor.
Intel (INTC) is another prominent player in the semiconductor sector but the company has been playing catch-up to sector leader TSMC. Unlike TSMC, Intel is an integrated device manufacturer (IDM), becauses it designs as well as manufactures chips. Meanwhile, Nvidia is a fabless semiconductor player, which means it doesn’t make its own chips.
On 15 February, Intel acquired Nasdaq-listed foundry Tower Semiconductor for $5.4bn in a bid to challenge TSMC for the top spot. Intel said that the deal will accelerate its path to become a major provider of foundry services and capacity globally.
Intel has also announced plans to invest over $20bn to construct two chip factories in Ohio, US, with production expected to start in 2025. TSMC’s own plans to expand its chipmaking capacity by building new factories in the US, China and Taiwan underlines the confidence chipmakers have on the demand outlook.
Other important players in the sector are South Korean duo Samsung (005930) and SK Hynix, Japanese semiconductor-making equipment maker Tokyo Electron, Netherlands-headquartered ASML, US-based Broadcom and China’s SMIC.
Semiconductor sector outlook: The end of crisis and risks ahead
Semiconductor manufacturers risk a future of oversupply as the majority of players in the sector have ramped up production and invested heavily in building capacity.
Investment bank JP Morgan said the cyclical nature of the chip industry suggests that there is bound to be a period of oversupply at some point in the future.
Asset manager PIMCO highlighted the risk of Sino-US tensions to the critically important sector and added that China’s path to semiconductor self-sufficiency is a “medium- to long-term risk, which could change the competitive landscape profoundly”.
As for the ongoing shortage, the question remains if the semiconductor shortage is getting worse. Analysts at ANZ Research said semiconductor supply chain constraints will likely remain tight in 2022 despite showing signs of easing.
Despite the ongoing crisis, the global semiconductor market is projected to grow from $452.25bn in 2021 to $803.15bn in 2028 at a CAGR of 8.6%, according to a Fortune Business Insights report.
Although the growing demand for semiconductors from various industries may serve as a price driver for numerous stocks, you should perform your own due diligence before making a decision to invest.
It’s important to do your own research and consider the latest market trends and industry news. Always remember that your decision to trade depends on your attitude to risk, your expertise in the market, the spread of your investment portfolio and how comfortable you feel about losing money. And you should never invest more than you can afford to lose.
FAQs
What caused the semiconductor shortage?
Pandemic-related supply chain issues in line with increased digitalisation and strong demand for consumer electronics contributed to the semiconductor shortage.
How will the semiconductor shortage affect stocks?
The semiconductor crisis affected various industries, including automobile and consumer tech. Auto makers and gaming console producers have been pressed lately by the semiconductor shortage, which made them struggle to meet consumer needs.
Meanwhile, semiconductor producers have experienced growing demand for their products, which contributed to their stocks’ growth in 2021. However, semiconductor manufacturers risk a future of oversupply at some point in the future, JP Morgan warns.
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