A deep dive into the global chip shortage - a roundtable discussion
Insights

A deep dive into the global chip shortage – a roundtable discussion

The global microchip shortage has become headline news, as repercussions have spread from core technology products to other chip-heavy consumer goods — from autos to appliances and beyond. But while the unique circumstances of the pandemic brought the supply/demand dynamics of the chip industry to the brink, it can be argued that the path to the crisis started decades ago. And as the pandemic hit, an unlikely but powerful set of factors combined to create an unprecedented shortage of one of the basic building blocks of our increasingly digital society.
Columbia Threadneedle analysts and investment leaders with a long history of researching and investing in technology came together to discuss the story behind the semiconductor shortage, how it happened and what we can expect next.
Question: It’s been said that the chip shortage was along time coming. What were some of the trends in supply and demand leading up to the current situation?
Paul Wick: The dynamics we’re seeing play out today have been building for a while. Digital semiconductor companies used to have their own production facilities. In the 1990s that started to change as the industry increasingly moved to outsourcing manufacturing to fabricators in Asia, mostly in Taiwan. So, instead of 40 large chip companies with their own facilities running at 70% or 80% utilization, you have a handful of dedicated fabricators that tend to run their factories at 90% plus utilization, which is much more effi cient. As a consequence, there’s a lot less slack in semiconductor capacity.
Sanjay Devgan: The way semiconductor companies hold inventory has also changed. Before the tech bubble in 2000, most original equipment manufacturers (OEMs) carried chip inventory on their balance sheets. One of the most infamous inventory write-downs in history was a $2.7 billion write-down by one of the big OEMs when the bubble burst. They no longer wanted to take that risk. So, over the last 20 years inventory on the balance sheets — and in the warehouses — of the OEMs has come down and the inventory on the balance sheets of semi suppliers has gone up.
David Egan: Concurrently, we’ve been witnessing a dramatic growth in tech intensity. Personal computers in the 1990s. Phones and then smartphones in the 2000s. And the soon-to-be gigantic companies that were building businesses around mobile internet — the Amazons and the Googles. At the same time, businesses in many industries were undergoing digital transformations. All of this added up to a steady increase in demand for semiconductors.

Question: How did the COVID-19 pandemic impact the current shortage?
Rahul Narang: There was a basic miscalculation of how COVID-19 was going to impact the world economies. Most assumed companies would cut back production as times were getting diffi cult, but demand proved to be quite resilient — even growing for some categories. People were stuck at home and buying and using more technology, whether it was new or additional PCs, bigger displays, 4K TVs, game consoles, remote meetings, etc. A sort of perfect storm formed that combined the demand miscalculation with lean inventories and a surprising consumer appetite for products full of microchips.
Charles Mann: Automakers in particular were hard hit, as they were unable to reinstate canceled chip orders when they realized consumers looking for safe transportation in the pandemic wanted more cars, not fewer. As cars have gotten more complex, data-driven and automated, the auto industry has become one of the major consumers of microchips. Chips have begun to take on and evolve into a new role in the automotive supply chain, becoming central to it – not only because of the “smart” content, but also the data sharing capabilities. In some cases, they’ve become so central that the lack of one specific, unremarkable chip can bring production to a virtual standstill.
David Egan: On the supply side, COVID restrictions on factory workers and international trade slowed production and delivery. On top of the pandemic disruptions, there was a fire in a major substrate facility (a key part of the chip packaging) in Asia. This affects things like gaming processors and networking equipment. We’ve seen reports that this has pushed product back from some companies for more than a year. And in February, the polar vortex in Texas shut down a number of big facilities, creating even more chinks in the semiconductor supply chain.
David Egan: On the supply side, COVID restrictions on factory workers and international trade slowed production and delivery. On top of the pandemic disruptions, there was a fire in a major substrate facility (a key part of the chip packaging) in Asia. This affects things like gaming processors and networking equipment. We’ve seen reports that this has pushed product back from some companies for more than a year. And in February, the polar vortex in Texas shut down a number of big facilities, creating even more chinks in the semiconductor supply chain.
Question: How will this situation be resolved? What is the path forward for the industry in the next couple of years?
Rahul Narang: It’s important to remember that some powerful longer term trends were also a factor in the resilience of demand during this crisis. The move to 5G, digital payments, digital enterprise transformation, cloud computing, cybersecurity, AI, autonomous driving, electric vehicles, battery technology and more. These are all things we’re watching closely, and when we step back and look at these themes, we feel that this pandemic has kind of hit what I’d call a giant fast forward button to the future for many of them.
Sanjay Devgan: From an investment standpoint, visibility for the semiconductor industry is probably at an all time high. Historically with semis, when you place an order, the order is only good for that quarter. And then you have to build the backlog for the next quarter. One major firm is leading a change in that paradigm, offering what they call a “preferred supplier program.” If you give them one year’s worth of non-cancelable orders, then they will move you to the front of the supply queue. Basically, this gives the company revenue visibility out for a year. And we’re seeing this type of thing happening across the entire industry. We’re also seeing that pricing from the foundries is going up, as well as materials prices, and the semi companies are able to pass that onto their customers on a cost-plus basis.
Sanjay Devgan: From an investment standpoint, visibility for the semiconductor industry is probably at an all time high. Historically with semis, when you place an order, the order is only good for that quarter. And then you have to build the backlog for the next quarter. One major firm is leading a change in that paradigm, offering what they call a “preferred supplier program.” If you give them one year’s worth of non-cancelable orders, then they will move you to the front of the supply queue. Basically, this gives the company revenue visibility out for a year. And we’re seeing this type of thing happening across the entire industry. We’re also seeing that pricing from the foundries is going up, as well as materials prices, and the semi companies are able to pass that onto their customers on a cost-plus basis.
The bottom line is that from the current vantage point, industry analysts and semiconductor companies are predicting chip shortages until the end of the year, and in some situations, into 2022. Despite this setback, we see the key demand drivers for technology continuing relatively unabated — some even accelerated by the realities and lessons of the pandemic. As the pandemic economy fades, we expect to see a slow, and hopefully orderly, shakeout of the chip shortage over the next 9-to-12 months. Over that time, our team sees strong fundamentals, and opportunities for value in the semiconductor sector, including equipment suppliers, OEMS and manufacturers, against continued broad and strong demand. Compelling growth trends in advancing and emerging technologies also have the potential to provide support for expanded capacity and chip supply over the longer term.
2 July 2021
Share article
Share on twitter
Share on linkedin
Share on email
Key topics
Related topics
Share article
Share on twitter
Share on linkedin
Share on email
Key topics
Related topics

PDF

A deep dive into the global chip shortage – a roundtable discussion

Important information

For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). This is an advertising document.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian fi nancial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defi ned in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This document has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the ce (Chapter 622), No. 1173058.

 

In the UK: Issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as fi nancial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other Person should act upon it. In Switzerland: Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated
in the UK by the Financial Conduct Authority. Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland

 

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

 

columbiathreadneedle.com

Related Insights

17 September 2021

Mark King

Head of Investment Content

Market Monitor - 17 September 2021

Stock markets around the world have had another volatile week, with concerns about the difficult post-Covid recovery to the fore once again. Most major indices have, however, managed to avoid serious losses.
Read time - 2 min
16 September 2021

Natasha Ebtehadj

Portfolio Manager, Global Equities

Cats, rivers & regulation: the lowdown on Chinese equities

Natasha Ebtehadj looks at the country from an equity investment perspective following a for-profit ban in education companies and increased regulation around its tech giants.
Read time - 3 min
14 September 2021

Daisuke Nomoto

Portfolio Manager, Japanese Equities

Topix hits 30-year high as PM Suga announces resignation

Daisuke Nomoto examines the events that have seen Yoshihide Suga resign as PM, looks at the potential candidates to replace him, and the implications of each for the market.
Read time - 3 min

You may also like

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Our funds

Columbia Threadneedle Investments has a comprehensive range of investment funds catering for a broad range of objectives.

Our capabilities

We offer a broad range of actively managed investment strategies and solutions covering global, regional and domestic markets and asset classes.