Forecasting demand in any industry was fraught with difficulties last year. The high tech industry was one of many sectors to get it wrong.

Manufacturing largely halted when the pandemic first struck. Then, predicting a sharp downturn in the global economy, the sector understandably did not anticipate demand growth in areas such as laptops for home-working and other electronic devices for entertainment. As the economy regained its footing, demand growth has accelerated further, and manufacturers have been playing catch up ever since.

Chip makers have been working hard to ramp up production, but they are largely failing to meet demand. According to the Ti dashboard, year-on-year growth in semiconductor shipments of 14.3% in Q1 2021 was the highest level of growth seen since Q4 2014, but this has not been strong enough to allow significant areas of industry to function effectively.

Source: Ti Dashboard with data from SEMI Silicon Manufacturers Group

According to Japan’s Ministry of Economy, Trade and Industry, its industrial output fell 6% month-on-month in May, caused largely by a lack of chips that reduced car production. Chinese manufacturing output growth also appears to be slowing. According to AlixPartners, the chip shortage is projected to lead to $110bn in lost revenue for car manufacturers worldwide in 2021.

Unfortunately, there seems to be no sign of the situation abating any time soon. According to Bloomberg, Intel CEO, Pat Gelsinger, recently commented: “I don’t expect the chip industry is back to a healthy supply-demand situation until ’23. For a variety of industries, I think it’s still getting worse before it gets better.” Volkswagen recently confirmed it expected the semiconductor shortage to continue to affect its results over the next six months. Forecaster LMC Automotive recently said it expects shortages to disrupt the sector through the second half of 2021, but that this could continue into 2022. For now, it looks like this shortage will continue to prevent an even sharper recovery in global freight volumes.

New semiconductor fabrications plants (fabs) are expected to come online in the years ahead which will help the industry over the longer term. However, the quantity of new plants coming online might be influenced by a number of factors.

Despite the positive noise around the industry, not least due to demand from advanced technology sectors such as 5G and robotics, and the automotive sector, some in the industry are not convinced of its potential. Broadcom Inc CEO Hock Tan recently commented that the industry is mature and suggested the recent boom would not lead to a fundamental change in longer term growth rates. These concerns appear to in part stem from the volatile demand patterns of the past, as can be seen from the graph above.

Furthermore, new fab investment should be determined by the type of chips needed by industry and this is subject to change over time. For instance, Intel is considering investing $20bn over 10 years in two fabs in Europe, possibly looking at 10 nanometre chip production, but there is inherent risk if Europe ends up requiring more mature models.

There are also various political forces dictating where such production should be located. Showing how engrained in the public consciousness the sector has become, a new poll from IBD/TIPP indicates two thirds of Americans (66%) say having a strong semiconductor manufacturing base is either “very important” (45%) or “somewhat important” (21%) to national security. However, the economics of shifting production to the US (or Europe for that fact) are not so positive. According to Forbes, the 10-year cost of a new fab in the US is 30% higher than building the same fab in Taiwan or South Korea, and up to 50% higher than in China. Some of these countries are subsidising such industries. For instance, according to Reuters, South Korea will increase tax breaks in the next three years to 6% from the current 3% or lower for key industries, including semiconductors. A US bipartisan proposal could also create a 25% tax credit for new domestic facilities.

For logistics providers, the high level of uncertainty creates challenges and opportunities. Kintetsu Express for instance has recently added charters to deliver ASEAN auto parts to US in anticipation of a rise in automotive production. However, suggestions of a strong uptick in chip-making over the next 6 months are tentative at best, leaving the possibility that the space will go unused. Over the longer run, prospects appear to be much more positive even if challenges remain. A shift towards more localised production may mean logistics providers need to alter services accordingly.

Source: Foundation for Future Supply Chain, July 14, 2021

Author: Andy Ralls

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