What you should know about the global microchip shortage

You might have seen in the news that we’ve reached a computer chip crisis, but what does this mean for you?
Semiconductor computer chip | Wealthify
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Over the last year and a half, these messages have become increasingly common for shoppers, and there’s a whole host of reasons to blame it on: Covid-19, Brexit (especially if you’re in the UK), the Suez Canal blockage, and now the global computer chip shortage.

But what is this chip shortage, why is it happening, what is the impact, and when will it end? We’ll see if we can answer some of these questions for you.

What is the global chip shortage?
Put simply, there are not enough semiconductors being made to meet the demand of manufacturing around the world. Semiconductors, which make computer chips and integrated circuits, are used in just about everything, from phones, televisions, microwaves, to cars, medical equipment and much more.

One product that’s in very short supply is the display driver – a very cheap and almost mundane item, with its only purpose being to send instructions to illuminate screens and show information. The problem is, without it, a lot of products simply cannot be made, creating a knock-on shortage of consumer products all around the world.

So, while you may not want the computer chip itself, chances are the thing you want requires it in order to work.

Why is there a computer chip shortage?
The why is a combination of a lot of different factors – almost a perfect storm of reasons in fact.

When covid initially hit, many manufacturers – such as the automotive industry – scaled back their orders of these chips as they slowed down or even temporarily closed their factories. And this made sense, the world was locked down, the stock markets had been hit hard, manufacturers made projections and forecasts based on the data they had to hand – the Global Financial Crisis (GFC).  

But consumer behaviour during these lockdowns didn’t follow the same pattern. Despite markets crashing and the world being locked down, we saw a surge in demand for technology. People working from home needed laptops, phones, monitors, computers, keyboards, printers, etc, their children also needed computers or tablets for remote learning – all things that require semiconductors.

Then, as lockdown went on, people who had built up their coronasavings may have been looking for new TVs, a personal computer, a smart fridge, the latest games console, or even a new car so they wouldn’t have to take public transport.

And, as brick-and-mortar retail wasn’t available, we saw more businesses improving their online presence and the purchasing of server space went through the roof[1] and more computer chips were needed to help meet this demand.

To top it off, there was a surge in cryptocurrency which drove up to the price of computer chips – as the processing required to ‘mine’ for currency needs a lot of energy and very powerful computing equipment, causing a shortage of high-end chips.[2]

A ticking time bomb
This shortage didn’t happen overnight. It’s a combination of many factors, compounding over several months, all coming to a head. With increased demand, but a reduced supply of semiconductors, there has been significant disruptions in supply chains across many industries.

For example, when covid-19 lockdowns happened, car manufacturers paused many factories. Showrooms couldn’t be visited, people couldn’t travel, so the demand for cars fell, which meant their demand for computer chips was reduced. However, in the last quarter of 2020, the world started to open up, and people wanted to travel without getting on public transport – this saw increased demand in cars, taking the industry by surprise and struggling to keep up with demand.  

Aside from projection issues, there were a number of geographical, logistical and political factors, such as the US-China trade war, nearly 7% of ocean freight not leaving China ports in Q1 2021, and global air cargo capacity being 25% less than last year.[3]

What’s the impact of this shortage?
We’ve seen this impact hit almost everyone, even big manufacturers and buyers – for example, Apple, one of the world’s leading purchasers of computer chips recently had to delay and stagger the launch of their iPhone 12 due to the chip shortage. And car manufacturers like Ford[4], Nissan, and Suzuki[5] have all slowed down or stopped their production lines. 

All of this, of course, has a direct impact on availability for the customer. Reduced supply and increased demand for this type of product are driving prices up. This means that even if they are able to find the item in stock, chances are it’ll be more expensive than it was previously.

What’s the impact on the markets?
This semiconductors shortage hasn’t just impacted the end consumer, it’s also influenced the economy and had an effect on various industries. Financial markets have taken a slightly negative view of this, as the knock-on effect is likely to be felt across all areas of the supply chain. We don’t expect this bottleneck to be permanent, but it isn’t as simple as flicking a switch. There’s even greater attention to this as the economy restarts and the threat of rising inflation hangs over the financial markets.

Since semiconductor production is running at full capacity, and building new capacity is too expensive and will take too long, delivery times are likely to continue being high in the short to medium term, which could lead to weaker earnings in industries dependent on these chips.

This shortage will likely see increased investment in the semiconductor capacity we have worldwide, however, this is an expensive and long-term approach. But with global demand on the increase, an investment today could lead to better growth in the future, and many governments may even be looking to incentivise where these chips are being made to have greater control over the supply of these very important parts.

 

  1. https://www.theregister.com/2020/05/07/omdia_server_record_growth/
  2. https://www.ft.com/content/d5c121c8-aefc-48d5-a3bf-6e581ccb5762
  3. https://hbr.org/2021/02/why-were-in-the-midst-of-a-global-semiconductor-shortage
  4. https://www.reuters.com/business/autos-transportation/ford-says-chip-shortage-slash-q2-vehicle-production-half-2021-04-28/
  5. https://www.reuters.com/business/autos-transportation/ford-says-chip-shortage-slash-q2-vehicle-production-half-2021-04-28/

 

With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.

 

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