Since the beginning of 2021, the world has experienced a widespread shortage of semiconductors. These silicon-based chips power everything from graphics cards to computing components, consumer electronics, and cars.
The shortage is largely attributed to the rising demand for consumer electronics and the internet of things (IoT) while the manufacturing sector hasn’t been expanding as fast.
The Covid-19 pandemic has also contributed to the shortage as it has forced people to stay and work from home. This means that people have bought additional computers, consumer electronics, and gaming consoles to adjust their lifestyles.
Chip manufacturers didn’t anticipate a rise in demand as well as the fast-record-breaking vaccine development time. At the same time, their manufacturing activity was disrupted by lockdowns and supply glitches.
The shortage has forced some automobile factories to close while others are still handling a huge backlog in production. The semiconductor shortage is estimated to cost the automobile industry $110 billion this year.
General Motors and other automkers have begun hoarding their chips for luxury cars while closing production lines for lower-end cars.
Manufacturers of semiconductor chips have already engaged in expansion projects to meet the growing demand. For instance, Intel has committed $20 billion for two new plants in Arizona, US and another possibly in Europe.
Taiwan Semiconductor Manufacturing Company, Limited (TSMC), the world's largest manufacturer, reported that it is operating at full capacity and is investing $30 billion to expand its production capacity.
The shortage is expected to last for two more years and will make consumer electronics expensive. This includes smartphones, TV sets, laptops, refrigerators, among many other devices. Cars might also suffer up to 11-week delays in delivery and higher prices.
While central banks around the world lowered interest rates to jump- start battered economies, the widespread effect has led to increased inflation which has subsequently reduced consumer purchasing power.
An average Kenyan worker whose salary has remained constant throughout the pandemic will find that their purchasing power is much lower today. Additionally, since most consumer electronics are imported, and the Kenya shilling/US dollar conversion rate is high, these goods reach our market at higher prices.
To transport these imports, the available avenues use oil. The global price of oil has risen considerably and thereby inflated transportation costs. This multifaceted hike in electronic prices faces yet another facet. That is, the manufacturers of these electronic products are buying semiconductor chips at higher prices and may be forced to increase their prices.
In summary, over the next two years, we expect the prices of electronics, cars, and other devices that use semiconductors to rise significantly. Businesses that use these products as raw inputs may have to prepare for tougher times.
US president Joe Biden has proposed a $2.3 trillion stimulus package that includes a $50 billion spending on US semiconductor self-reliance. This comes after a group of chip manufacturers ganged up to push for state funding.
Though some technology trade groups are against this move arguing that it would bring abnormal market interference, such funding would largely benefit the chip manufacturers as well as their customers.
A sneaky way of offsetting this risk is by investing in the companies that manufacture semiconductor chips. This is mainly because demand for their products is rising rapidly. While the global economies reopen, having achieved sufficient vaccination rates, the demand for products that use semiconductors is set to skyrocket and the chip companies may experience expanded sales revenues.
This means that a company or individual may endure higher prices for products that use semiconductors while still benefiting from the stock growth of their investment in chip companies.
Some of these companies include Nvidia, Advanced Micro Devices, Intel, Qualcomm, Applied Materials, TSMC, Micron Technology, Broadcom, NXP Semiconductors, Lam Research Corporation, and Xilinx. These stocks are tradeable on platforms provided by locally regulated forex brokers such as Scope Markets.
It is possible that the tech companies that use semiconductor chips as their inputs might get lower sales revenues due to the shortage and even post contracted profits over the next two years.
This includes smartphone manufacturers such as Samsung and Apple, motor vehicle manufacturers such as Tesla and Volkswagen, and electronics manufacturers such as LG Electronics and Philips Kohn. So before investing in these companies, research the individual company’s semiconductor supply and how it is handling the shortage.
On the brighter side, semiconductor companies are doing everything in their power to grab this expanded market share. They are expanding their production lines, opening new manufacturing plants, and raising new funds to expand their businesses.
Though new semiconductor manufacturing plants take long to implement, usually two years and above, there exists hope that these companies will fast-track the process and meet global demand in record time. This is expected to bring balance in the market and lower prices of products that use semiconductor chips by the first quarter of 2023.
Kamau is a research & markets analyst at Scope Markets Kenya [email protected]