Why there’s shortage of chips, new cars: ‘Supply chain is no longer in our control’
(St, Louis Business Journal)
October 26, 2021 (James Drew)
The global semiconductor chip shortage likely will drag into late 2022 or early 2023.
That’s according to Ying Ko, senior analyst with Clayton-based Argent Capital Management. She follows technology, telecommunications, health care and industrial businesses.
In the St. Louis area, the shortage caused General Motors last month to idle production at eight North American plants, including its Wentzville Assembly plant for two weeks. Nationwide, the shortage has resulted in higher prices for some electronics and fewer items for sale such as laptops.
Earlier this year, auto executives had projected the chip shortage would lessen by the end of this year. Ko said from following the tech industry for several years, people frequently underestimate the length of a trend, whether it’s inflation, demand for a product or a shortage.
“The semi industry is very volatile, because it’s very much sensitive to supply and demand changes. Hopefully, this will resolve itself in late 2022 or early 2023,” she said.
The Business Journal spoke to Ko – who joined Argent in 2006 and is fluent in English, Chinese, Mandarin, Cantonese and Shanghainese – about the topic.
Why is there a global semiconductor chip shortage? With Covid, manufacturing and transportation got hit because people couldn’t go to work in Asia. The other part of Covid was a big shift in what kind of electronics are in demand. Before Covid, everything is predictable. “This is how many (personal computers) we want. This is how many cars we drive.” A lot of the manufacturing and the supply chain are trained to a global demand for electronics.
Covid hits and all of a sudden, we work from home and we play from home. We want a bigger TV and we want more Wi-Fi. We want a new washer. All of a sudden, the world’s demand for electronics shifted over night. The next thing you know, we have a shortage. That had been building for two or three years because of disruptions in the supply chain as companies tried to avoid the Trump tariffs on China.
How will the semiconductor chip shortage affect companies in the St. Louis area in 2022? There’s an auto shortage globally. Historically, auto components are not the cutting edge of semiconductors. Not a lot of semi manufacturing companies want to make auto components because it’s not usually a high-margin business. They rely on volume. Auto is being impacted a lot. Rental (car) rates are being ratcheted up.
How will the shortage affect consumers in the St. Louis area? With inflation, it’s not even that the price of the washing machine is 30% more, possibly. It’s more like Best Buy won’t put anything on sale because there aren’t as many items in the store to buy, so there’s no need for them to go on sale.
Just look at the Christmas season. The Black Friday sales will still be here, but there might be smaller amounts of items and they may be available for a shorter period of time.
Is it clear yet how the shortage will be fixed? Right now, a lot of the semiconductor manufacturers are adding capacity. The largest manufacturer in the world is Taiwan Semiconductor Manufacturing Co. They are the hired gun of the world. They’re increasing their investment in their plants. But these plants take a long time to build and they require a lot of power. A lot of the capacity should start to hit the system in a year or so.
The question is a year from now, when we have more capacity, will the demand be this strong? Will the demand for cars remain or will it shift to something else?
The Wall Street Journal has reported that the U.S. and Europe produced more than three-quarters of the world’s semiconductor chips in 1990. Now, they produce less than a quarter. Why is that and what are the prospects for increased chip production in the U.S.? There are a couple of things. Inside the U.S., the regulation is very high on environmental impact. Producing semiconductors is a very toxic process. In the U.S. and Europe, that costs a lot of money to mitigate. In China, the regulations are not as stringent. In Taiwan and South Korea, since the 1970s and 1980s, the governments have said this is where we are going to build our economies.
The U.S. and Europe have more advanced economies. In the life cycle of an economy, you want to go into more services and protect your environment, so you let other economies still on the developing curve take the lower rung of the value chain.
What the U.S. and Europe need to start to consider is national interest. We are at a point where our supply chain is no longer in our control.
Intel has talked about increasing its manufacturing capacity in the U.S. Intel is waiting for Congress. The lobbying group, the Semiconductor Industry Association, is asking the federal government to support the semi industry with an incentive worth $52 billion dedicated for semi manufacturing.
Does Argent have mid cap and/or large cap investments that are benefiting from the chip shortage? Yes, for the large cap we have Applied Materials (NASDAQ: AMAT) and for the mid cap we have Entegris (NASDAQ: ENTG). Both of them are providers of the equipment that make semi chips.