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How the global semiconductor shortage may impact businesses in 2021 and beyond

business-articlesHow the global semiconductor shortage may impact businesses in 2021 and beyond
With the worst of the coronavirus pandemic behind us, and vaccines rolling out in most major nations, analysts are forecasting a strong global economic recovery in 2021.

However, this recovery could be impeded by a new threat – a global shortage of semiconductors, which could set back businesses as they seek to return to growth this year.

What is causing the semiconductor shortage?

The semiconductor shortage began in 2020 as the coronavirus pandemic hit.

However, while it unsurprisingly suffered some disruption as a result of global lockdowns, the shortage of semiconductors has been mostly driven by unprecedented demand.

As most of us were forced to stay indoors, demand soared for devices which would allow us to work from home and products to keep ourselves occupied through the lockdown, such as games consoles.

The global rollout of 5G infrastructure as well as large orders placed by Chinese tech giant Huawei ahead of US trade restrictions have also fed through into the unprecedented levels of demand.

There have also been problems with sourcing the parts needed to build chips, with a fire at a Japanese factory limiting supplies of a special fiberglass used for printed circuit boards in July last year, and another fire at a separate Japanese factory in March 2021 further exacerbating the issue.

In addition to all this, severe constraints in international shipping have caused extra strain, with the pandemic causing significant disruption to ocean freight.

How long is the semiconductor shortage expected to last?

Existing semiconductor foundries are already operating at capacity, and lead times for new chips are at least six months according to Taiwan Semiconductor Manufacturing Company (TSMC), with analysts warning that the current constraints on supply could very well bleed into 2022.

Peter Richardson, a partner at Counterpoint Research, said:

‘The semiconductor manufacturers are working hard to fill the gaps in supply. But it will take time before investment translates to more supply.

‘This means that shortages for some products may continue for several months - possibly even in to 2022.’
Recognising the issues presented by the shortage, more than a dozen business groups in the US sent a letter to President Joe Biden, urging the government to subsidise the construction of new chip factories.

At the same time, TSMC increased its capital spending budget to $28 billion to fund the building of additional manufacturing facilities.

However this can be a lengthy process and even if construction was to begin right now, it could be 2024 before these new factories are ready to start producing semiconductors in any significant numbers.

Analyst Richard Windsor comments:

‘It takes about 18 to 24 months for a plant to open after they break ground, and even once you've built one, you have to tune it and get the yield up, which also takes a bit of time.

‘This isn't something you can simply switch on and switch off.’

What industries have been impacted by the chip shortage?

With semiconductors being ubiquitous in the 21st century, most businesses are likely to have felt the impact of the shortage in some way, even if it is just more difficult to procure new IT equipment for employees working at home.

Perhaps the sector worst hit by the current semiconductor shortage has been the automotive industry, which needs the chips for parts such as touchscreen displays and collision-avoidance systems that are essential in newer electric models.

The pain currently being felt by the car industry is partly self-inflicted, as the collapse of car sales in spring 2020 at the start of the coronavirus pandemic caused automakers to slash orders for new chips.

However, by the late summer, when car sales rebounded more strongly than expected, most chipmakers had already switched their production lines over to meet the unprecedented demand for consumer electronics and IT hardware.

With the automotive industry facing a so-called ‘chipageddon’, a number of automakers have taken the drastic steps to halt production at some of their plants, with US automotive giants Ford and General Motors forecasting their profits in 2021 will be hit by up to $2.5bn and £2bn, respectively.

Another key sector to be hit has been consumer electronics, with Sony and Microsoft’s new PlayStation and Xbox games consoles expected to miss sales targets this year due to the semiconductor supply issue.

Apple, the world’s single largest buyer of semiconductors and estimated to purchase over $58bn annually, was last year forced to delay its new iPhone 12 by two months due to the shortage, whilst its rival and the world’s largest producer of computer chips, Samsung, has warned of a ‘serious imbalance’ in the semiconductor industry and suggested it may even scrap the launch of its next Galaxy Note smartphone as a result.

Consumers to face increased costs

The laws of supply and demand mean that the prices of semiconductors are only set to rise so long as the shortage continues, especially as manufacturers seeks to invest significant capital in founding new production factories.

These increased costs will inevitably be passed on to the consumer, who are likely to face higher prices for cars, TVs and mobile phones at a time when finances have already been stretched thin.

Neil Campling, media and tech analyst at Mirabaud comments:

‘Chips are everything. There is a perfect storm of supply and demand factors going on here. But basically, there is a new level of demand that can’t be kept up with, everyone is in crisis and it is getting worse.

‘There is no sign of supply catching up, or demand decreasing, while prices are rising across the chain. This will cross over to people in the street. Expect cars to cost more, phones to cost more. This year’s iPhone is not going to be cheaper than last year.’

This is not to mention how a shortage of products could lead some consumers to pay inflated prices on eBay and other online marketplaces.
With demand set to outstrip supply and no quick or easy solution to boosting capacity, not to mention the myriad of other problems which are hampering supply chains, the current semiconductor shortage shows no signs of abating anytime soon.

Should this problem persist into 2022 as some analysts are predicting, then the impact on businesses could be massive, particularly for smaller firms who will not have the buying power to ensure they have priority.
Currencies Direct

Currencies Direct

Currencies Direct is one of Europe's leading non-bank providers of currency exchange and international payment services. Since we were formed in 1996, we've maintained our focus on providing innovative foreign exchange and international currency transfer services to corporations of all sizes, online sellers and private individuals. We have also expanded our services to provide dynamic and pioneering "business to business" solutions to help companies, tier 2/3 banks and other non-bank financial institutions to process their international payments. Our headquarters are in the City of London (United Kingdom) and we have operations in continental Europe, Africa, Asia, and the United States. Currencies Direct is jointly owned by private equity firms Palamon Capital Partners and Corsair Capital.

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