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UNRAVELLING THE MYSTERY OF MISSING SEMI-CONDUCTOR CHIPS

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What are semiconductor chips?

Well, a simple explanation! the chips are there in almost everything we use today. The chips are there in our computers, phones, TVs, cars – it allows us to make purchases on our credit cards and power our play stations, etc. As is evident from the below chart, semiconductor chips applications touch almost every part of our existence.

Source: Fortune business insight

What is the mystery behind the global shortage? 

The global shortage of chips has happened primarily due to the Covid 19 pandemic when many companies pulled back their order of semiconductor chips in anticipation of the expected slowdown in the economy due to prolonged & intermittent lockdown. But when Governments around the world ordered people to stay at home that created a new kind of crisis for the industry as online ordering of goods skyrocketed –  whether for purchase of computers for home offices, fitness equipment to stay fit, electronics and gaming devices to be entertained during the lockdown period with the pandemic accelerating the pace of digitalization. Once the industry realized that the slowdown in demand was only temporary, they also had to come to terms with what was seemingly then a “TINY” problem if there weren’t enough chips to back the new orders.

An insight into the chips manufacturing industry reveals that the world produces nearly trillions of chips every year and there are not many companies in the world that produces chips. There are around 3000 steps and vastly specialized machines required to manufacture chips. The chips manufacturers also have to use a large quantity of ultrapure water to clean factories –  Taiwan’s TSMC’s facility alone used more than 63 tons of water a day in 2019 that makes up more than 10 percent of the supply of two local reservoirs. Not surprisingly, therefore, when in 2021 Taiwan experienced its worst drought in more than 50 years the situation turned even more bleak for the chips industry. In Japan a major fire broke out in Renesas Electronics Naka factory and gutted large parts of the building which produces automotive mini controllers for every car – this was indeed a cruel blow for the global automotive industry.  The lead time between ordering semiconductors and delivery has now increased to record-breaking 18 weeks. The near-term chip shortages are hammering the auto industry out of shape and forcing them into shutdowns and costing them billions of dollars in lost production and sales. The world’s largest automakers General Motors said it could lose up to $2 billion as the chips shortage forced it to temporarily shut down some of its manufacturing plants. Overall, it is estimated that the global automotive industry will produce four million fewer vehicles than planned and lose roughly 110 billion dollars in sales.

For someone hoping to purchase any of his/her favorite gadgets, the wait may get agonizingly longer. Until then, we will perhaps have to keep our purchase & delivery expectations low and allow the shortage and supply chain bottlenecks to gradually ease out.

Meanwhile, if you are an investor and want to dip your toe in semiconductor stocks, here are  two quality semiconductor ETFs that may be worth considering:

  • iShares Semiconductor ETF NASDAQ: SOXX – this ETF contains 30 chip manufacturing  companies
  • VanEck Vectors Semiconductor ETF NASDAQ: SMH – this fund owns 25 stocks encompassing semiconductor chip companies from around the globe.

However, it’s worthwhile to keep in mind that the performance of semiconductor stocks can be tricky because earnings can be very volatile. Hence, one should have a lot of patience when investing in semiconductor stocks. In the long run, as demand for semiconductor chips continues to edge up over time, investing in this industry may well turn out to be very profitable.

This article is authored by Nanda S, Co-Founder Alphaniti (www.alphaniti.com)