NEW YORK (Reuters Breakingviews) - Some companies will need to get used to the global chip drought. Pandemic-led demand swings and trade wars have left factories short of microprocessors. The semiconductor industry’s coming splurge on new capacity will benefit smartphone manufacturers and data centers more than automakers.
Shortfalls are widespread. The $340 billion Nvidia hasn’t been able to meet demand for graphics chips it designs for about half a year. Sony warned there may be shortages of games consoles this Christmas. Carmakers are facing a particularly severe squeeze because they canceled orders during the pandemic. General Motors says the chip shortage may slash its earnings by up to $2 billion this year, while Ford Motor estimates a hit to its bottom line worth as much as $2.5 billion.
Chip shortages usually spawn subsequent gluts as manufacturers rush to meet demand, and investment is underway. Taiwan Semiconductor Manufacturing, the biggest chip contract manufacturer, plans to increase capital spending by about 50% to as much as $28 billion this year.
Not all chip buyers will benefit equally, however. Most investment will increase production of advanced chips used by customers like Apple. Applied Materials, a maker of gear for semiconductor plants, says about 70% of its equipment orders are used to make cutting-edge chips. The industry doesn’t have much incentive to build new fabrication plants to produce lagging-tech chips, since there’s less time to recoup the investment. Older plants can keep producing for years for customers that don’t need the latest state-of-the-art chips.
Industries that use simpler semiconductors may therefore face shortfalls for a while. Automakers used about $40 billion of chips in 2018, according to Digitimes Research, and demand is increasing. Infineon Technologies, the $57 billion German group, estimates a traditional automobile uses microprocessors worth about $400. Fully electric vehicles need twice as much and self-driving ones will use far more.
No shortfall lasts forever. Customers can eventually use more advanced and more expensive chips. Manufacturers will be tempted to boost investment. Indeed, Applied Materials says sales of less sophisticated tech gear have grown faster over the past decade than the most advanced new technologies. And both the United States and European Union are weighing subsidies for domestic chip manufacturing. Even so, it may be a dry year for some.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.