consumer electronics

Asia trade brief: the global chip shortage

  • How long will the chip shortage last? We expect the ongoing global chip supply shortage to persist into mid‑2022, as pandemic-induced demand for consumer electronics remains strong this year.
  • Disruption of the chip supply chain will fade more quickly in some sectors than others. Home appliances, which rely on less sophisticated chips, may benefit from a quicker expansion in global production to meet demand. Manufacturers of consumer electronics and cars, that require integrated circuit chips, may face longer delays.
  • A severe resurgence of Covid-19 in key Asian markets, including Taiwan and Vietnam, presents the most severe downside risk to this timeline. While our forecasts do not expect the wide re‑adoption of full national lockdowns across Asia, the imposition of such measures would risk exacerbating the current chip and electronic shortage to a more devastating degree.

Soaring demand for consumer electronics amid the Covid-19 pandemic kept Asian trade flows strong last year. This particularly benefited manufacturers of integrated circuits (ICs), with total global exports growing by almost 15% in US dollar value terms in 2020. Geopolitical friction between China and the US, along with the former’s plans for technological self-sufficiency, have driven Chinese stockpiling of foreign-manufactured ICs, chip-making equipment, and other critical intermediate inputs. Together, these factors have supported industrial and trade activity in Taiwan, South Korea, China, Singapore, and elsewhere.

We expect these demand trends to persist in 2021‑22, underpinned by new waves of infection, which will keep demand for remote-working equipment stable. This will be the main driver of Asian external sector growth in those years. However, production disruption, local Covid-19 flare-ups and logistics challenges now cast a shadow over these assumptions. The ramifications of the chip shortage also carry consequences for Asia; although regional chipmakers have benefited from this demand windfall, downstream consumer electronics and car manufacturers have not. Production bottlenecks for chip users risk disrupting industrial performance more broadly, carrying consequences for employment, tax revenue and headline economic growth. How long will these trends last?

The chip industry is unlikely to normalise this year

The world’s leading chip producers, including Taiwan Semiconductor Manufacturing Company (TSMC), Samsung (South Korea) and Intel (US), expect the current chip shortage to last until 2022—an assessment shared by major chip customers in the automotive and electronics industries. These projections align with our forecasts for national vaccination programmes. We expect major Western markets, where much of this demand is concentrated, to achieve widespread vaccination by late 2021, with timelines for most OECD countries extending into mid-2022. This will keep demand for phones, laptops and entertainment systems elevated over much of that same period. This timeline for chip production may even be slightly ambitious, considering the long lead times between order and manufacture, as well as recent transportation disruption and costs derived from sky-high sea freight rates (the latter of which we now expect to persist well into the third quarter of 2021).

Some sectors may recover more quickly than others. We expect the auto chip shortage to persist into mid‑2022, for numerous reasons; car producers, many of which cancelled their chip orders at the onset of the pandemic, underestimated the speed of the potential rebound in auto demand. As they scrambled to re-issue their orders, many found themselves at the back of the production queue—and behind consumer electronics firms, which are also rushing to meet strong consumer purchases. Compounding this, carmakers also constitute a relatively small proportion of chip purchases, at around 10% of the global total. Although some governments, including the US and China, are urging chipmakers to prioritise output for the auto sector, existing revenue streams suggest that there is little commercial incentive for major chip manufacturers to do this, particularly if it necessitates redirecting production away from consumer electronics, which is more profitable.

By contrast, the home appliances sector may experience a slightly quicker rebound. White goods rely on less sophisticated chips, which can be sourced from a wider set of producers. In recent years chip manufacturing has drifted steadily towards more innovative (and profitable) production, to the primary benefit of select firms in Taiwan and South Korea. However, other parts of emerging Asia—such as China and some South-east Asian countries—remain important producers of older generation ICs (also known as “mature” nodes), many of which are still used in common home appliances. The presence of these more numerous suppliers, along with their more diversified geographic distribution, suggests a shorter timeline for supply to catch up with demand.

However, the complexity of the chip manufacturing environment means that some crucial challenges persist. For example, insufficient investment in 200-mm wafer capacity, on which many mature nodes are manufactured, had been cited as a structural weakness in the chip industry even before the pandemic. As a result, even if the chip shortage for home appliances abates by early 2022, companies should still prepare for significant demand-and-supply imbalances this year.

What are governments and companies doing about the global chip shortage?

Although the US and EU have announced ambitious spending packages aimed at reshoring the IC industry to their territory, the establishment of factories is costly—and will take time. Instead, remedying the current global chip shortage will rest primarily with Asia, where the global IC industry has been concentrated following decades of tax incentives and subsidies.

The region is not standing idle. In May 2021 South Korea announced US$450bn in support packages and tax incentives to expand domestic chip manufacturing, while SK Hynix, a South Korean producer of dynamic random-access memory (DRAM) chips, is frontloading its capital expenditure from 2022 to the second half of 2021 to meet its global orders. TSMC plans to invest US$100bn over three years to meet similar goals, and in late May Japanese authorities asked that company (and Sony, a Japanese electronics maker) to establish chip fabrication facilities in Japan, to support the automotive, industrial machinery and home appliance industries.

Capital investment nevertheless takes time, and even in established fabrication plants, chip-making is a process that takes months. Based on these announcements, along with historic timelines for the expansion of semiconductor production capacity, we estimate that these plans will only start to bear fruit by around 2023‑24, with continued work extending until 2030. This will probably dovetail with moves to promote further vertical integration, continuing a process of supply-chain integration that had already taken root before the pandemic, with major technology firms—including Apple, Amazon (both US) and Huawei (China)—at the forefront of these efforts. The chip shortage will spur these endeavours as technology firms seek greater control over production processes (including by reducing reliance on contract manufacturers) and, in the case of Chinese firms especially, pursue “secure” supply chains that are free from geopolitical or trade risks.

These plans carry long-term risks of their own. The current rush to increase production could lead to a supply glut; overcapacity in electronics manufacturing had already depressed producer prices across North-east Asia before the pandemic. This could force consolidation in 2024 and beyond, as companies struggle to remain competitive once global electronics demand trends normalise after the pandemic.

Return of the coronavirus

Our bullish regional export outlook is anchored on the assumption of successful pandemic mitigation in 2021, even as regional vaccine campaigns extend into next year. These expectations are now increasingly being drawn into question. Taiwan is currently battling with its most severe Covid-19 outbreak to date, while South Korea and Japan are similarly struggling with pandemic resurgence. All three markets play critical roles in upstream global IC production.

These dynamics are not limited to Asia’s most innovative chip producers, with other leading export markets for electronics—including those that are home to significant operations spanning IC assembly, packaging and testing—also facing renewed Covid‑19 incidence. Multiple hotspots have emerging across Vietnam, although our baseline scenario does not include the introduction of a nationwide lockdown. Malaysia has recently gone back into lockdown, which will push it back into recession, while Thailand’s continued public health crisis has quashed hopes of a robust economic recovery in 2021. The saving grace is that authorities in all markets remain unwilling to reimpose full lockdowns that would shutter factories; this should minimise the disruption of production. Nevertheless, worsening case loads will magnify this risk over the third quarter, which could prolong any timelines for the recovery in global chip supply.

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