• ETF Insights

    Chip Demand Rises Beyond Expectations

    Meghana Pakala, ETF Product Analyst
     

    Technology has evolved at a rapid pace over the past twenty years, and with those advances, the importance of components that go into our electronics has also grown. Semiconductors are an integral part of nearly every device people use today, from home appliances such as televisions and air purifiers to larger machines such as trains and automobiles. The recent chip shortage has caused many companies, particularly automakers, to pause production, and order delays have reached record numbers as the shortage worsens.

    We believe the extraordinary demand for semiconductors over the past few months has been largely due to the effects of the pandemic. The work-from-home era has spurred sales of laptops, webcams, and other office gear, all of which come with customized chips. As consumers bought more personal electronics, companies ordered more chips to keep up with demand. However, the second half of 2020 saw car sales rebound much faster than automakers had expected. As a result, many orders placed at the end of the year were turned down as chipmakers were already stretched thin supplying computer and smartphone companies.

    To add to the booming demand, semiconductor supply was already predicted to tighten in early 2020. Companies such as Huawei Technologies,1 a Chinese smartphone maker, and its competitors began stockpiling chip inventory as they prepared to survive U.S. sanctions that were set to cut it off from its primary supplies. China’s import of chips climbed to nearly $380B last year, up from $330B in 2019.2

    Global Semiconductor Consumption, 2003 - 2019

    Global Semiconductor Consumption, 2003 - 2019

    Source: PwC; SIA; IC Insights, Gartner; CCID Consulting, Statista.

    Semiconductor plants were also hit by a wide range of disasters this year, forcing production to be interrupted and shut down for large periods of time. Some specific instances include power outages in Texas that resulted in facilities shutting down for months, fire damage at a Japanese plant run by a major automotive chip provider that halted production for weeks, and a record breaking drought in Taiwan that threatened manufacturing. These major disturbances have had a huge ripple effect on the global chip supply, but despite the production issues, revenue grew 10% in 2020 and is expected to increase another 12.5% by the end of this year.3

    The United States and China are both investing heavily in expanding domestic semiconductor production.4 Manufacturing these chips is a process that requires incredible precision, along with huge long-term bets in a field subject to rapid change- plants cost billions to build and equip, use enormous amounts of water and electricity, and they have to run 24/7 just to recoup the initial investment. Many companies are also pouring money into expansion efforts, but even new plans that have already5 been announced will not begin production until 2022, meaning the supply shortage is sure to last well into next year.

    The pandemic has pushed chip demand beyond levels projected before 2020, and the technology is only heading up. As more people work from home for the indefinite future and the proliferation of 5G networks drives heavy data consumption, we expect the market demand for even more powerful chips will continue to expand. Although the shortage is causing trouble in many industries, we believe the semiconductor field is seeing a burst of creativity, with innovative designs gaining traction and heralding an exciting, high-efficiency future for the industry.


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