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Cars and trucks contain an increasing number of chips.
Dream time
As computer-based technology plays a bigger role in everyday life, the demand for semiconductors that power it has steadily increased. Meeting this need is generally a smooth process, but the pandemic has stopped it. Now, manufacturers of everything from video game consoles to cars are facing a shortage of microchips.
General Motors (ticker: GM) was the last company to disclose the extent of the damage. Management told investors early Wednesday morning that it expected an impact of $ 1.5 billion to $ 2 billion this year for an adjusted profit measure. The company had to shut down manufacturing at three facilities in Canada, Mexico and the United States by mid-March, it said Tuesday.
“GM’s plan is to take advantage of all available semiconductors to build and ship our most popular and in-demand products, including large trucks and SUVs and Corvettes to our customers,” said the company.
GM is not the only major automaker that has been affected.
Ford Motor
(F) interrupted the production of at least one plant;
Volkswagen
and its subsidiary Audi also cut production.
Modern cars and trucks contain dozens of chips, a number that will only increase as more cars feature power steering technology or are built with electric motors. By 2022, Deloitte estimates, each car will have about $ 600 in chips, almost double the $ 312 in 2013.
This change, plus the pandemic, are the main factors behind the current crisis. With the spread of the coronavirus last year, new car sales have plummeted. Carmakers thought the recovery could take years, so they dug deep into their stocks instead of buying new chips,
Analog Devices
(ADI) CEO Vincent Roche said Barron’s last month.
A specific bottleneck appears to be a type of semiconductor called microcontrollers – essentially very small computers – that are used for things like engine control systems, according to Pierre Ferragu, an analyst at New Street Research.
Semiconductor manufacturing in Taiwan
(TSM), one of the world’s largest chipmakers, and other executives have confirmed the microcontroller problem.
Unlike some other products, increasing chip production can take time. The Semiconductor Industry Association said recently that it usually takes 26 weeks from the time a carmaker orders a chip until it is delivered. For more advanced microprocessors, manufacturing capacity sometimes needs to be guaranteed years in advance.
In addition, Ferragu wrote, trade tensions between the U.S. and China have caused some chip makers to shift production from China
Semiconductor Manufacturing International
for Taiwan Semi. These changes disrupt manufacturing as chip designers adjust their supply chains and manufacturing moves from one factory to another.
As for the duration of the scarcity, says Ferragu, there is no easy solution. Supply restrictions were mentioned in all sectors, as semiconductor companies reported their financial results in recent weeks.
And solving the scarcity can bring its own problems. Companies that supply chips to the auto industry have a sense of how demand is doing in the first quarter, and outsiders among them are warning that inventory could increase as automakers place aggressive orders, Ferragu wrote. This creates the potential for excess.
Yet,
ON Semiconductor
(ON) CEO Hassane El-Khoury said Barron’s last week that, at least for now, there is no immediate concern about the increase in stock. For example, El-Khoury said that if the chips he sends to a distributor are not shipped to a manufacturer within a week, his company will redirect them to another customer, who will want them immediately.
“I’m going to talk to them because I have another end customer who would like that today,” he said.
For other chip-dependent industries, the shortage is likely to continue at least during the first half of the year, potentially more.
Advanced micro devices (AMD)
CEO Lisa Su said the shortage of supplies is likely to continue into the second half of the year. This suggests video game consoles from both
Sony
and
Microsoft
Video game consoles may remain in short supply in 2021.
Ferragu wrote in a research note that sales of smartphone units are yet to double, despite supply restrictions. Still, his team is closely monitoring increases in chip manufacturing capacity at companies like Taiwan Semi,
Samsung Electronics,
and GlobalFoundries.
As companies manufacture various types of semiconductors, inventories tend to react differently to supply issues. For companies like Micron Technology (MU), which makes memory, a more restricted supply is usually related to higher prices, which increases profit.
Investors, for their part, seem to see scarcity as a positive factor. The PHLX Semiconductor index has advanced 41% in the last six months, while the Nasdaq Composite has gained 28%.
Write to Max A. Cherney at [email protected]