By Wallace Witkowski
This article is part of a series tracking the effects of the COVID-19 pandemic on major businesses and sectors. For other articles and earlier versions, go here.
A global shortage of semiconductors — chips that power massive data-centers, modern autos and countless digital devices — has roiled global manufacturing and is not expected to end soon. It isn’t a blanket problem, however, as different sectors within the chip industry will continue to be affected by the shortage in different ways.
As the industry entered 2020, high demand was expected in the mobile chip area because of the rollout of 5G devices. That path was turned on its head when COVID-19 became a global pandemic, driving millions, if not billions, of people into the safety of their homes to work, go to school, be entertained and to socialize.
Demand for chips powering laptops, gaming devices and internet infrastructure skyrocketed, while chip demand for auto and industrial uses plummeted. When the factories that make basic computer components couldn’t make them fast enough, already-long customer waiting lists for those factories got even longer. With demand remaining high and little additional chip-making capacity expected in the short term, the shortage is expected to last into at least next year.
That dynamic has been good for chip stocks. The PHLX Semiconductor Index /zigman2/quotes/210598361/realtime SOX -0.27% has rallied 92% over the past 12 months, when COVID-19 shelter-in-place protocols were just beginning to settle in and people across the world were trying to adapt to the new normal. In comparison, the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.01% rose 50% over that period, and the tech-heavy Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -0.30% gained 65%.
The supply-demand imbalance will eventually be solved, and investors will want to watch upcoming earnings reports and forecasts for signs of lessening demand or increased supply. So far, no signs have popped up: Chip makers across the board turned in better-than-expected earnings reports and outlooks for 2021, as COVID-19 accelerated a global reliance on a digital infrastructure.
As a new earnings reporting season begins , the different sectors of semiconductors could react differently to the shortage. Here is what to know and look for.
The chip shortage effectively crippling the auto industry illustrates the worst effects of the phenomenon as crucial parts to produce finished cars and trucks are unavailable and causing automotive manufacturers to halt production.
Ford Motor Co. /zigman2/quotes/208911460/composite F -2.72% said at the end of March it was shutting down production at more plants because of a lack of auto chips, following production cuts of its F-150 pickup truck in February. Several other auto makers announced they had shortages of chips for their cars.
Bernstein analyst Stacy Rasgon told MarketWatch in an interview that the automobile industry shows a stark example of how a disruption of chip supply can affect other industries.
“The auto supply chains had the most whipsaws because of COVID,” Rasgon said.
When COVID hit, auto makers canceled all their orders because auto demand dropped off, Rasgon said. When demand returned, auto makers tried to reorder what they had canceled, but found themselves out of luck because the facilities that made the parts they needed were busy making high-demand components for other industries, Rasgon said. On top of COVID, the recent blizzards in Texas further disrupted the supply chain, and auto makers generally do not keep much inventory on hand when it comes to electronics.
That’s likely to change, Rasgon added.
“We’re going to see some radical changes in supply-chain management because of what’s happened this past year,” Glenn O’Donnell, research director at Forrester, told MarketWatch.
Maribel Lopez, principal analyst at Lopez Research, told MarketWatch that many product designs that rely upon electronic components often take months or years to develop and are vulnerable in that you can’t just “swap out” parts
“If you look at the F-150, it’s a really expensive truck being probably held up by a $50, $60 part, or even less,” Lopez said. “In some cases we had clients that had very expensive products, say it was $1,200, being held up by a 3-cent part.”
And given that autos are held to such high safety standards, you can’t cut corners and hope for the best. It’s a situation where you need to have all the components in a design or you can’t sell the product.
“The issue is you need all of them,” Rasgon said. “If I don’t have a 50-cent microcontroller that controls the seat belt, I don’t build the car.”
Major automobile chip suppliers include Texas Instruments Inc. /zigman2/quotes/202237907/composite TXN +1.31% , Analog Devices Inc. /zigman2/quotes/201631938/composite ADI +0.93% , Netherlands-based NXP Semiconductors NV /zigman2/quotes/202999625/composite NXPI +2.46% , Germany’s Infineon Technologies AG /zigman2/quotes/203152288/delayed XE:IFX -0.43% , South Korea’s Samsung Electronics Co. /zigman2/quotes/209800866/delayed KR:005930 +0.74% , and Japan’s Renesas Electronics Corp. /zigman2/quotes/203872935/delayed JP:6723 +2.66%
“They’re shipping everything they make,” Rasgon said.
Most recently, Intel Corp. /zigman2/quotes/203649727/composite INTC -0.86% told Reuters it’s i n talks with companies that design chips for auto makers to start manufacturing those chips for them to resolve supply shortages. Intel is scheduled to report earnings on April 22.
PC sales got a huge shot in the arm as the world scrambled to adapt to working and going to school from home because of COVID-19. Research firm IDC expects sales volumes to grow by 18% in 2021 with shipments of 357.4 million, after rising nearly 13% in 2020.