Semiconductors, also known as integrated circuits, microchips or chips, are a part of our everyday lives. They power advanced technologies in healthcare, computing, communications, transportation, military systems and more. Whether you’re reading this article on a smartphone, laptop, tablet or PC, semiconductors are involved.
Since last year, the world has been experiencing a shortage of chips. In this article, we first provide background information about semiconductors, followed by an explanation of the shortage and its implications. We then share the top semiconductor firms and how you can invest in them through our platform.
What are semiconductors?
Semiconductors are materials that possess electrical properties in between those of conductors (i.e., copper) and insulators (i.e., rubber). They therefore control electrical currents. Semiconductor devices can be used to amplify signals, switch and convert energy.
The most common semiconductor material is silicon. Silicon Valley, the epicenter of innovative technology companies in the US, got its name from the number of semiconductor and computer-related companies in the area.
While they are tiny in size, they are the brains of modern electrical devices. For example, smartphones, laptops, computers, televisions, appliances, LED bulbs, gaming consoles, medical equipment and cars all rely on semiconductors to function. An automobile alone has around 100 chips, powering braking systems, steering, displays and touchscreens, airbags, air conditioning, windshield wipers, electric windows, etc.
The semiconductor industry explained
The semiconductor industry is highly competitive, with a handful of companies dominating. Chip plants cost billions to build and equip, and large budgets for research and development are required to continuously improve products, making them smaller, cheaper and faster.
Some companies are involved in the production process from start to finish. However, others outsource some of the process, such as design or testing. Companies centered around manufacturing semiconductors are called foundries, for example, Taiwan Semiconductor Manufacturing Company (TSMC).
Profit margins, in this case, are slim, and companies need to run 24/7 to make a return on their investment. They also have to sustain yields (the number of working chips per batch) of 80-90% to be competitive, which takes years of experience to achieve. The process is also quite lengthy, taking up to 26 weeks to manufacture a chip for a consumer.
The semiconductor industry is highly cyclical, responsive to supply and demand fundamentals. When times are good, demand for chip products increases and chipmakers have trouble keeping up with demand, and prices may increase. On the other hand, when conditions are less favourable, there can be an oversupply, and prices may fall.
Why is there a chip shortage?
The current shortage of semiconductors is on a global scale, and the Covid-19 pandemic has contributed to it. Supply chains were disrupted due to stay-at-home restrictions and capacity limitations for safety precautions. Consumer behavior changed, and demand for electronic devices, such as laptops, monitors and gaming systems, increased. Electronic companies therefore began placing larger orders and stockpiling chips to meet demand. At the same time, auto companies ordered fewer chips and underestimated how quickly auto sales would bounce back.
However, Covid-19 isn’t only to blame for the chip shortage. Even before the pandemic, new technology, such as 5G devices, was causing an increase in demand for semiconductors. The trade war between the US and China also made an impact. In one case, for example, the Trump administration barred American companies from selling to Semiconductor Manufacturing International Corp (SMIC), a Chinese company partially owned by the Chinese government that produces about 10% of the world’s chips.
Implications of the chip shortage
A substantial number of companies within the automobile industry have already felt the impact of the semiconductor shortage. For example, leading carmakers, such as General Motors, Ford, Daimler, Nissan, Honda, Volkswagen, NIO and Fiat Chrysler, have had to pause or reduce production. According to Bloomberg, the auto industry could lose up to $61 billion in sales during 2021 due to chip shortages.
Companies in other industries have also felt the impact. For example, Samsung, one of the largest producers of semiconductors and consumer electronics, said it might delay the launch of a new Galaxy Note smartphone because of the lack of semiconductors available. Apple also warned back in November that it was experiencing a shortage of chips for its latest iPhone.
To catch up with increased demand, semiconductor companies are ramping up production. However, Bloomberg said the shortage could last several quarters or into 2022.
In terms of stock prices, Bloomberg reported that the shortage impact differs from company to company and from industry to industry. Zooming in on chip stocks specifically, they have outpaced the S&P 500 and the S&P 500 tech sector so far this year. However, some analysts said there is a worry that the semiconductor cycle will soon peak.
Top players in the semiconductor industry
The top semiconductor makers in terms of revenue are either American or Asian companies:
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The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.
Sources: Financial Times, Bloomberg, Reuters, The Washington Post, Harvard Business Review, South China Morning Post, Investopedia, Investor’s Business Daily, Barron’s, Forbes, Volkswagen, Intel, Semiconductor Industry Association, AMD