Supply Chain Issues: When Will the Chip Shortage End?
Supply Chain Issues: When Will the Chip Shortage End?
Supply chain issues are widespread and prevalent, with the ongoing chip shortage causing reverberations across many sectors --- auto, tractors, to name a couple. Among those most affected is the auto industry, where chip shortages are holding up production and denting sales.
Semiconductors or chips are a crucial element in the manufacturing of electronics such as tractors, smartphones, cameras and computers. In cars, they are needed for everything from entertainment systems to power steering. For the auto and heavy equipment industries, the supply crunch and shortage of chips has forced car and heavy equipment manufacturers to cut production and delivery targets and has led to a number of profit warnings.
Why Is There a Chip Shortage
In the simplest terms, the current chip shortage is due to strong demand and no supply. This goes back to COVID-19 lockdowns in the second quarter of 2020, when demand for work-from-home technology increased exponentially and manufacturers found themselves competing for the semiconductor capacity located in Asian foundries.
Adding to the problem, downstream operations in South Asia were adversely impacted by the COVID-19 Delta variant, creating further bottlenecks in the supply chain. Malaysia in particular performs many “back-end” operations such as chip packaging and testing, which is more labor intensive than wafer fabrication processes, so activity is more easily affected by public health measures.
At the beginning of the pandemic, car and heavy equipment companies cancelled orders, but as production ramped up again towards the end of 2020, there was no semiconductor supply available. This was compounded by demand increases, particularly at the higher end of the heavy equipment market, as low interest rates were aiding affordability.
While the COVID-19 pandemic was the initial catalyst for the chip shortage, structural factors are also part of the picture. Industries are changing, with a major shift towards automation and electric vehicles. These require yet more chips, causing further strain on already stretched industries.
When Will the Chip Shortage End?
More chips will become available in the second half of 2022 and the shortage is nearing the end according to J.P. Morgan Research. However, available chips may not be the right type to satisfy all demand.
Currently, capacity is being freed up due to weakness in some end markets, particularly PCs, smartphones and consumer electronics, where sales have been falling since March 2022. Foundries in Taiwan are beginning to reallocate some of this capacity to the automobile and industrial end markets, which lost out to other sectors during the COVID-19 pandemic.
“We’re going to get a lot more semiconductor capacity in the second half of 2022 – we’re nearing the end of the supply crunch” said Sandeep Deshpande, Head of European Technology Research. “However, capacity still needs to be qualified for use in the automotive industry. Can the right matching occur between available supply and correct qualification? This is the difficulty that remains. If there wasn’t this issue, I would be of the opinion that things could be normal by the end of the year.”
2022 has so far been marked by production disruptions across many fronts. In addition to existing semiconductor shortages, the Russia-Ukraine conflict and COVID-19 outbreaks in China have affected global supply chains and production.
“The U.S. market, like other regions, has been characterized by robust pricing power across original equipment manufacturers (OEMs),” said Jose Asumendi, Head of European Automotive Research at J.P. Morgan. “This has been underpinned by low inventory levels, strong underlying demand and tight supply of semiconductors due to strained supply chains.”
The second half of 2022 will start to reflect supply chain recovery according to J.P. Morgan Research.
“We are noticing that major OEMs are expanding production across plants,” said Asumendi, with car makers announcing plans to hire more staff and invest more in their manufacturing facilities.
The long-term outlook for the sector is positive according to Asumendi. “We are starting to see meaningful signals of production stabilization in Europe as well as improvement signals in China,” he added.
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