Semiconductor shortage: what is it and how does it affect the ASX?

World-renowned automobile makers like Renault, Volkswagen and BMW have been in the headlines recently warning about the effects of the global semiconductor shortage. Tata Motors, India’s biggest automobile manufacturer, this month halved the sales forecast of its luxury car brand JLR due to the chip shortage. Growth at manufacturing factories in China have dropped to four-month lows due to the shortages, while Japan has also experienced the biggest monthly drop in industrial output in a year - car production fell by over 19% last month. Goldman Sachs expects up to US$20 billion to be wiped from global carmakers’ operating profits in 2021, but it isn’t just the auto sector that is hurting. What happened? Semiconductor manufacturers, like everyone else, were negatively impacted by COVID-19, temporarily shutting down. Consumer demand was expected to be weaker, but in the wake of lockdowns around the world led to huge increases in demand for computers, laptops, mobile phones and video game consoles and other electronic devices. That was offset, however, according to consultancy firm McKinsey, by reduced demand for semiconductor chips from the auto industry as people stayed home. The semiconductor industry grows by around 4% annually, in line with sales. However, utilisation of semiconductors has been consistently high, at or above 80%, for more than a decade. So, though the semiconductor industry has increased its production capacity by nearly 180% since 2000, its total capacity is nearly exhausted at the current high utilisation rate. What does the future look like? It isn’t very rosy, at least in McKinsey’s estimation. “In the short term, we don’t see any indication that the current supply and demand imbalance for semiconductors will resolve,” it said in a report released in May this year. “That’s because typical lead times for semiconductor production can exceed four months for the products that are already well established in a manufacturing line. “Increasing capacity by moving a product to another manufacturing site usually adds another six months, even in existing plants. “Switching to a different manufacturer typically adds another year or more because the chip’s design requires alterations to match the specific manufacturing processes of the new manufacturing partner.” For the auto industry, McKinsey says chip capacity won’t catch up with demand in the short term. “That is primarily because of the continued increases in volume and sophistication levels of the chips needed to power new technologies, such as advanced driver-assistance systems and autonomous driving.” Across the board, hopes for recovery in the semiconductor industry appear slim in the short term; McKinsey suggests the industry should work more closely with customers in future to develop sufficient semiconductors for specific needs. “As auto players ponder their next moves and semiconductor manufacturers struggle to keep up with demand, both industries need to align their short- and long-term strategies to weather the supply-chain disruption as successfully as possible.” Morgane Delledonne, director of research at Global-X ETFs, recently told Proactive he expected to see greater investment in chip design and manufacturing alongside attempts to reshore strategic components of the chip industry to domestic markets. “The semiconductor shortage will have a palpable impact across multiple industries in 2021,” he said. “As semiconductors become increasingly important to a digitised economy, governments and businesses are reassessing their dependence on supply chains that run through foreign countries. “Companies are questioning the sector model and their lack of vertical integration, while policymakers are looking for ways to incentivise breakthroughs in semiconductor research, innovation, and production.” How does it affect the ASX? There are a small number of players in the semiconductor space on the ASX. Archer Materials Ltd (ASX:AXE) (OTCMKTS:ARRXF) (FRA:38A) is hard at work developing advanced semiconductor devices, including ‘labs-on-a-chip’ that integrate biosensors relevant to point-of-care medical diagnostics and processor chips relevant to quantum computing. The 12CQ chip is a world-first technology Archer is building for quantum computing operation at room temperature and integration onboard modern electronic devices. Quantum computing aims to utilise quantum mechanical phenomena to power the next generation of computers. Its other major technology project is a biochip with unique graphene-based biotechnology that it is building to enable the complex detection of some of the world’s most deadly communicable diseases. In mid-June, the company made progress in the development of its biochip by establishing essential chip testing operations in a semiconductor fabrication environment, an essential step in developing and commercialising the company’s biochip technology. Strategic Elements Ltd (ASX:SOR) operates under a Pooled Development Fund (PDF), an Australian Federal Government program designed to encourage innovation and investment into Australian companies. It has a range of forward-thinking projects it is developing; recently its moisture-fuelled battery successfully powered a Bluetooth sensor device. The tech-centric venture builder is working to create extremely small, thin and lightweight battery ink cells that can be printed on glass or plastic and self-charge as they detect humidity in the air or on a wearer’s skin. Now, those batter cells have successfully powered a Cypress Semiconductor Internet of Things (IoT) sensor kit with temperature and humidity sensors and Bluetooth connectivity. - Daniel Paproth