Is the Semiconductor Shortage Over?
Key insights into the current supply chain struggle around the manufacturing of semiconductors and how they’re affecting global industries and economies.
Authored by Alex Caraman, Christina Chen, David Kang, Ronit Mirchandani, and Seohyun Shin, with guidance and editing by Caleb Guo
Introduction
Whether in Electric Vehicles, communication systems, or energy grids, semiconductors are a key product. This post explores the extent of impact semiconductors have on various industries, as well as paints a picture of what the future may bring. Below, we will discuss the recent semiconductor shortage, the effect on the market and economy, as well as the race towards semiconductor domination by the world’s two superpowers.
What is a Semiconductor?
A semiconductor is a material that has electrical conductivity between that of metals and insulators and can be modified by external factors such as light or heat. From the precursors of semiconductors of the nineteenth to those of the modern-day, semiconductors have seen widespread use in many industries such as Radio, IT, and Automotive industries. Physicists started experimenting with semiconductive materials in the nineteenth century but since there were no practical applications at that time, progress was slow. This changed in the first half of the twentieth century when breakthroughs enabled semiconductors to handle large currents, enabling radio, radar, telephone, and photography innovations that would change the world. In 1947, the first silicon transistor was used in a computer instead of slow and bulky vacuum tubes, accelerating humanity’s technological advance and shaping the semiconductor-dependent world we live in today. There are two main types of semiconductors. N-type semiconductors are used for higher conductance, being made of pure silicon or germanium (chemically similar element to silicon) to which arsenic and phosphorus are added for a negative charge, hence the N. The other type of semiconductor is the P-type, which has a positive charge as gallium and indium and are added to pure silicon.
Reasons for Shortage
Over the last decade, one factor of the semiconductor shortage has been the surge in electric vehicle (EV) usage with more than 10 million EV’s on the road in 2020, a 43% increase in usage over 2019. Through the COVID-19 pandemic, total EV registrations initially declined about one-third before experiencing a strong rebound as global EV manufacturers saw their sales grow by 70%. Prompted by the initial drop in car purchases, automakers cut back on orders on all parts orders, including chip orders. Then, as demand rebounded, chip manufacturers were unable to meet the new demand as they had already made commitments to supply chips for consumer electronics and IT. Thus, suppliers simply did not have the semiconductor supply to meet this demand. The semiconductor shortage has resulted in production cutbacks from Ford, Toyota, Nissan, and Volkswagen, with many others announcing that they will not be able to meet their 2021 targets.
Another reason for the semiconductor shortage comes from geopolitical factors, more precisely, the Trump administration strictly regulating semiconductor sales to Chinese technology firms such as Huawei Technologies and ZTE. With American regulations, the Chinese government retaliated by blacklisting American manufacturers. This trade war subsequently caused a 5.36 billion USD decline in Chinese imports of semiconductors. The semiconductor shortage is especially apparent in older models of semiconductors for chips used in cars and appliances. Chip producers have begun shifting towards the manufacturing of advanced chips with higher profit margins to increase aggregate annual economic profit, resulting in a rise from $3.5 billion in the 2000s to $29.3 billion from 2016–2020. While this shift increased profit, manufacturers are ill-equipped to produce older models of chips, furthering the downward pressure on the supply of semiconductors.
The reaction by the Market
Supply chain constraints including shortages of semiconductors have had far-reaching implications on the markets. The negative impact of this drawn-out shortage has been felt by corporations irrespective of size and sector. Additionally, the chip shortage has created potential headwinds for GDP growth and is forecasted to cost as much as 1 percent of the U.S. 2021 GDP growth. Since these chips are essential inputs for manufacturers in diversified industries, concerted efforts have been made to ameliorate the chip shortage.
An example of one such effort is the acquisition of Maxim Integrated (formerly $MXIM) by Analog Devices ($ADI). Analog, an American semiconductor company, announced a $20.8 billion USD all-stock deal in July of 2020. This deal marked an effort by Analog to expand its reach in more markets as well as exploit the newly formed synergies from the acquisition. The rationale behind the deal was that the newly formed conglomerate would see an increase in revenue numbers of $8.2 billion USD. This deal brought together the second and third-largest players in the analog semiconductor market, to mitigate the shortage by bolstering supply chains. The acquisition increased economies of scale and gave the conglomerate greater control over the prices of the components. The outlined acquisition is just one of many recent such deals given the secular wave of consolidation that the semiconductor industry has witnessed. Additionally, the deficit in the supply of microchips has weighed negatively on the profitability of the world’s largest technology companies. Technology behemoth Apple announced that it would cut its iPhone 13 production by 10 million units earlier this year, costing the company $6 billion USD in sales for Q4 alone. Furthermore, they forecast a shortage of 5 million units of iPhone during the upcoming holiday season if the trend continues. Analysts expect the shortages to further exacerbate poor top-line performance in the December quarter.
The semiconductor shortage is set to apply upward pressure on inflation numbers that have been persistently and consistently higher than the Federal Reserve’s 2% target. Goldman Sachs estimates that an inflationary tax of 3% could be levied on all affected goods as a direct result of the supply chain bottleneck. It is reasonable to assume that the semiconductor deficit will continue to be a negative catalyst for the markets if the shortage is not improved soon.
Looking Forward
In the past, the United States has been a leader in the semiconductor industry. According to the Semiconductor Industry Association, it possessed 48 percent of the market share in 2020. However, it has been experiencing a decline, as US-located manufacturing plants accounted for just 12 percent of the world’s semiconductor manufacturing, a substantial decrease from 37 percent in 1990. On the other hand, there has been a signal showing a change in the leading power with China taking strategic action. China is a net importer of semiconductors that heavily relies on foreign manufacturers. A notable strategy that China has been implementing is the Made in China 2025 initiative which, by increasing the production of domestic chips to 40 percent by 2025, is targeted to catch up with its rivals such as the US. China has been attempting to decrease its reliance on the US by using financial incentives and intellectual property to accelerate the development of its semiconductor industry.
In response, since the former Trump administration, the US has been tightening semiconductor export controls with licensing policies specifically on Chinese entities. The US has also been supporting its domestic semiconductor industry and companies such as Intel. Intel, one of the leading companies in the semiconductor industry on a global level, introduced its multiyear strategy manufacturing expansion plans in March 2021. These include two new factories in Arizona and a $20 billion expansion program in the US. According to Intel, an estimate of over 3,000 permanent high-wage and high-tech jobs, 2,000 construction jobs, and 15,000 local long-term jobs will be created. Factors that drove Intel to build two factories in Arizona included the state offering a favourable tax and competitive utility rates. Intel has also announced that it would be more open to “co-opetition” and is planning to partner with traditional rivals such as Samsung.
With the continued global recovery from the pandemic, strong edge device demand, and 5G mobile phone replacement cycle, the industry has experienced substantial changes, especially from the leading countries. As the industry affects the national security and the economy of countries, countries such as the US and China have been showing interest in increasing domestic manufacturing of chips. The Semiconductor Industry Association expects the global industry to increase manufacturing capacity by 56% in the next decade.
Conclusion
Semiconductors have had and will continue to have, a substantial impact on the world’s economy. With increasing importance on semiconductor self-sufficiency, both China and the US have made investments towards semiconductor production. The importance of semiconductors has been highlighted by the recent shortage, and the resulting extensive impacts have been felt over a multitude of industries. As electric vehicle demand continues to grow and no end in sight to the US-China trade war, much remains to be regarding the future of semiconductors.
