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22 June 2021

Chip Shortage

The semiconductor chip shortage is not an event that many would have seen coming or even cared about. However, the global ramifications have been, and will likely continue to be, significant. Given the constantly changing global environment in which we find ourselves, the importance of accurate forecasting of demand is vital, not only to companies selling products and services but also their suppliers and competitors. As with most recessions, the forecasts for demand for the majority of products fell significantly as economists predicted badly-bruised economies and stretched consumer purse strings.
 
While this did turn out to be somewhat correct, the rapid rebound and impressive resilience of consumer spending surprised many, with demand quickly returning to normal for many products given the plethora of governmental support. As such, any fall in demand for new smart phones or cars rapidly picked back up, causing mild panic across various industries over whether they would be able to meet demand given the low forecast order numbers they had lodged with their suppliers.
 
Semiconductors were of course at the forefront of such problems. In recent decades, the increasing prevalence of technology has given rise to the semiconductor, with the ever-smaller chips now used in cars, data centres and alarm clocks amongst others. Its variable and wide-ranging usage now makes it one of the most essential components to our daily lives, with the pandemic only fuelling this reliance further.
 
Microchips have evolved the transport sector from a means to travel from A to B to a fully-integrated experience that allows the driver more freedom and enjoyment through large touch screen displays and self-driving capabilities. This has of course meant that the industry has become increasingly reliant on such chips to develop and finish their cars, with the products now a mission critical part of the manufacturing process. The shortage has, then, become a major issue for many companies, with BMW and Jaguar Land Rover both announcing closures to their UK-based facilities due to the crisis. While these are only planned for a handful of weeks, it could mean delays to customer orders and a loss of reputation for both companies.
 
There is a light at the end of the tunnel, however, with Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chip manufacturer, signalling that it believes that it will be able to catch up with automotive demand by June. While this may seem ambitious and automobile manufacturers will likely continue feel the effects towards the latter stages of 2021, a greater understanding of the situation and a slowdown in lead times will help companies plan for the coming months.
 
Given the almost complete pick up of working from home (WFH) as companies adapt to the new COVID-19 reality, at least in the short-term, the demand for home working infrastructure has significantly increased. While this does cover the more obvious areas such as computers and Wi-Fi, it also requires newer realms of the working environment, most notably, data centres. As the general public continues to WFH, firms become increasingly reliant on cloud computing, the way in which files and data are saved that allows access from any location, as long as you have an internet connection. This has fuelled the demand for data centres, the location in which such data is stored and unsurprisingly such locations require a large number of highly complex microchips.
 
Given then, the significant demand increase, not only from forecast levels but also pre-pandemic levels, the price of semiconductors increased sharply during 2020, bucking the trend of a long-term slowdown in prices. The supply/demand imbalance has helped to create a perfect storm for companies operating within the industry, with prices rising and demand skyrocketing, semiconductor stocks have performed extremely well over the past two years, far outperforming their relative indices. This is, however, not a short-term phenomenon. Semiconductor stocks have far outperformed their relevant indices for some time now, given the rising prevalence of their products worldwide and their future application across new and exciting areas of technology such as AI and machine learning.
While we would expect the effects of the chip shortage to abate somewhat in the coming months, the likelihood that some companies could continue to run into problems is likely to continue into the initial months of 2022. While this is unfortunate for the companies which semiconductor companies supply, the suppliers themselves are likely to benefit from an enhanced demand runway into next year and far beyond.
 
This does, however, highlight the increasing importance of semiconductors in our lives and the important role that companies play in accurately forecasting consumer demand. As chips become ever more integral to supply chains and future technologies, companies should attempt to maximise supply in order to keep up with demand and effectively innovate within their respective industries.
This article was taken from issue 9, Market Insight. To sign up for our investment publications please visit www.redmayne.co.uk/publications.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
 
Chip Shortage
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