Citywire spoke to Gavekal Asia analyst Vincent Tsui about his recent note ‘The never-ending chip shortage’ (below).
The deficit of supply is not going away any time soon.
As Vincent says in his video interview above: ‘ I think [the shortage might end] in 2023, 2024 – or even later.’
Nine months after the world’s carmakers began to complain about difficulties sourcing the silicon chips they need to make their automobiles, it is becoming clear these shortages are not just the result of short-lived disruptions.
Sure, the pandemic has played havoc with global hardware supply chains. But Covid is worsening underlying shortcomings baked into the semiconductor manufacturing industry.
This means there will be no early end to the problem, which will weigh on the export performance of East Asia’s manufacturing economies as they struggle to emerge from the Covid pandemic.
Far from getting better, the problems afflicting the world’s automakers are getting worse. In mid-August, Toyota announced it will cut global production by 40% from September, while Ford and General Motors both extended the production downtime at their North American factories.
The supply bottlenecks are not only troubling automakers. Much of the current shortages affect commodity chips, relatively unsophisticated gizmos needed for sensors, display units, power supply controllers and the like contained in a myriad of products.
Yes, Tesla is having trouble sourcing chips for airbags and seat belts. But Whirlpool is also struggling to get hold of microcontrollers for its refrigerators and washing machines.
Even blue ribbon customers that long enjoyed first call on producers’ supplies are facing problems. Microsoft is short of chips for its Xbox game consoles. And in July, Apple chief executive Tim Cook said shortages of low-end chips are constraining sales of the company’s flagship smartphones and tablets.
These shortages were not created by the pandemic, only revealed by it. For years, even as demand for low-end chips proliferated, suppliers had little incentive to invest in new, highly capital-intensive production facilities for commodity chips, given the slim margins they earn and the meagre returns on capital they generate.
However, existing bottlenecks in the supply of low-end chips are not the whole story. The enormous burden of the capital investments needed to compete at the technological frontier in the most advanced chips is also having an impact.
In mid-August, Intel unveiled a new strategy which will see it outsource manufacturing of subcomponents known as “tiles” or “chiplets” to former rival Taiwan Semiconductor Manufacturing (TSMC).
This highlights the ‘winner takes all’ dynamic at the leading edge of chip development. With its vast scale and capital resources, TSMC is increasingly monopolizing production of the world’s most advanced chips.
As other competitors fall by the wayside, they are outsourcing more of their production to the Taiwanese giant, which is devoting more of its capacity to meeting the demand at the very highest end of the market.
This means fewer resources going into lower-margin products, which is where the bottlenecks are.
The resulting chip shortages are going to ripple along Asia’s supply chains for years to come. Over the last 12 months, the impact has barely dented the region’s headline trade figures.
Export values have captured new highs as producers have made the most of existing capacity and drawn down inventories. But with exports having surpassed their pre-pandemic peak, from now on chip shortages will be felt increasingly acutely.
This will cast a cloud over the outlook for Asian currencies, which over the last 12 months have performed strongly on the back of the region’s export recovery
Now, exports face the risk of disappointment from a high base, even as the US Federal Reserve moves towards tapering and Asian central banks resist tightening.
The upshot is that investors should favour exposure to Taiwan as the biggest winner from chip shortages, and reduce exposure to Korea as a broader-based exporter, and therefore a relative loser from the continuing bottlenecks.
This piece was originally published by Gavekal, and is republished with permission.
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