Car companies are halting production because their vendors can't supply electronic components. Laptops are struggling to meet demand because they don’t have computer chips. Mobile phone companies are having to pay through the roof to source critical parts. And it’s all happening because the world is witnessing an unprecedented semiconductor shortage. So in today’s Finshots, we talk about this and more.


The Story

Companies dabbling with semiconductors are in a highly specialized business. They are few and far between and they spend billions of dollars planning for the future.

As we wrote in one of our articles earlier 

Intel spent close to $8.5 billion in building a fabricator that could produce its flagship E5 chips. These were sophisticated enterprise-level chips and they weren’t easy to produce. The research and development cost $11.5 billion. Mistakes cost extra. And this doesn’t include time commitments. Companies have to plan years in advance to build this kind of capacity and scaling production can be quite a challenging task.

So you can’t wake up one day and suddenly ramp up supply. It’s almost next to impossible to achieve this kind of scale. And the likes of Taiwan Semiconductor Manufacturing Company (TSMC) — the largest semiconductor company in the world haven’t been investing aggressively over the past few years. As one article notes — “From 2015 to 2019, the capital investment cycle remained conservative across the industry.” It further goes on to add — “Taking a closer look at the semiconductor capital investment trends during the past few years, it becomes clear that under-investment is the root cause of demand-supply imbalance, particularly in logic (non-memory) semiconductor industry.”

And that’s the crux of the problem. We didn’t think we’d need this many semiconductors. Especially the kind we use for computing stuff. The kind that goes on cars, gaming consoles, mobile phones and laptops. And it’s now pushing us to the brink. However, semiconductor companies should have jumped into action last year when it became evident that the supply lines were being stretched thin. They knew it was inevitable. And truth be told, they would have done it if it weren’t for Covid.

Expanding capacity in the middle of a pandemic isn’t exactly easy. So they were forced to defer plans. And if reports are to be believed, companies are gearing for a massive capacity building exercise this year after having struggled to expand last year. TSMC, for instance, said it would raise nearly $9 billion in a bid to expand in 2021. You’ll likely see other companies follow suit as well. So if all goes well, the problem should be alleviated by the end of 2021.

However, the current predicament isn’t a result of the supply crunch alone. Companies like Huawei, for instance, have been building semiconductor reserves over the past few years. And the pandemic forced people to spend on sophisticated consumer appliances that further dented supply lines. As an article in Bloomberg notes  “Industry executives also blame excessive stockpiling, which began over the summer when Huawei Technologies Co. — a major smartphone and networking gear maker — began hoarding components to ensure its survival from crippling U.S. sanctions. Led by Huawei, Chinese imports of chips of all kinds climbed to almost $380 billion in 2020…Rivals including Apple, worried about their own caches, responded in kind. At the same time, the stay-at-home era spurred sales of home appliances from the costliest TVs to the lowliest air purifiers, all of which now come with smart, customized chips.”

Also, the impact of this shortage isn’t uniform across the board. The likes of Apple can negotiate better than small time vendors. Meaning, if you are in an industry that sources a lot of semiconductors then you have better bargaining power, plain and simple. Auto manufacturers unfortunately rely on third party vendors who don't source a lot of semiconductors. At least not on a relative scale. So they've been affected real bad.

Bottom Line — The semiconductor shortage is pulling multiple industries to its knees and now you know why.

Until then...

Share this Finshots on WhatsApp, Twitter, or LinkedIn.