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Cars and trucks contain an increasing number of chips.
The time of dreams
As computer technology plays a larger role in everyday life, the demand for semiconductors, which power it, has steadily increased. Meeting this need is usually a smooth process, but the pandemic has interrupted it. Now, manufacturers of everything from video game consoles to cars are facing a shortage of microchips.
General Motors (ticker: GM) was the latest company to disclose the extent of the damage. Management told investors early Wednesday that it expected an impact of $ 1.5 billion to $ 2 billion this year, with a measure of adjusted profit. The company had to stop production at three factories in Canada, Mexico and the United States by mid-March, it said on Tuesday.
“GM’s plan is to use every available semiconductor to build and deliver the most popular and sought-after products, including large trucks, SUVs and Corvettes for our customers,” the company said.
GM is not the only major automaker that has been affected.
Ford Motor
(F) has stopped production by at least one factory;
Volkswagen
and its subsidiary Audi also reduced production.
Modern cars and trucks contain dozens of chips, a number that will only increase as more cars have assisted driving technology or are built with electric motors. By 2022, Deloitte estimates, each car will have chips worth about $ 600, about double that of $ 312 in 2013.
This change, plus the pandemic, are the main factors behind the current crisis. As the coronavirus spread last year, sales of new cars declined. Car manufacturers thought the recovery could take years, so they delved into their inventories instead of buying new chips,
Analog devices
(ADI) CEO Vincent Roche said Barron’s last month.
A specific blockage appears to be a type of semiconductor called microcontrollers – essentially very small computers – that are used for things like engine control systems, according to New Street Research analyst Pierre Ferragu.
Taiwan Semiconductor Manufacturing
(TSM), one of the largest chip manufacturers in the world, and other executives have confirmed the microcontroller issue.
Unlike other products, increasing chip production can take a long time. The Association for the Semiconductor Industry recently said it normally takes 26 weeks from the time a car company orders a chip until it is delivered. For more advanced microprocessors, production capacity must sometimes be provided years in advance.
In addition, Ferragu wrote, US-China trade tensions have led some chipmakers to switch production from China.
Semiconductor Manufacturing International
the Taiwan Semi. Such changes interrupt manufacturing as chip designers adjust their supply chains and manufacturing moves from one factory to another.
As for how long the absence will last, says Ferragu, there is no easy solution. Supply constraints were generally mentioned, while semiconductor companies reported their financial results in recent weeks.
And solving the deficit could bring its own problems. Companies that supply chips to the auto industry have an idea of how demand expands in the first quarter, and candidates warn that inventory can build up as car companies order aggressively, Ferragu wrote. This creates the potential of a glute.
Yet,
ON Semiconductor
(ON), said CEO Hassane El-Khoury Barron’s last week that at least for now, there is no immediate concern about accumulating inventory. For example, El-Khoury said that if the chips he delivers to a distributor are not sent to a manufacturer within a week, his company will redirect them to another customer, who would like them immediately.
“I will have the conversation with them because I have another end customer who would like it today,” he said.
For other chip-dependent industries, the shortage is likely to continue at least in the first half of the year, possibly longer.
Advanced Micro Devices (AMD)
CEO Lisa Su said the lack of supply is likely to continue until the second half of the year. This suggests video game consoles from both
Sony
and
Microsoft
video game consoles may remain low in 2021.
Ferragu wrote in a research note that it expects sales of smartphone units to double, despite supply constraints. However, his team is closely monitoring the increase in chip production capacity at companies such as Taiwan Semi,
Samsung Electronics,
and GlobalFoundries.
Because companies produce different types of semiconductors, stocks tend to react differently to supply problems. For companies like Micron Technology (MU), which creates memory, a stricter offer usually correlates with rising prices, which adds to the profit.
Meanwhile, investors seem to see the shortfall as a positive factor. The PHLX Semiconductor Index has advanced 41% in the last six months, while the Nasdaq Composite has gained 28%.
Write to Max A. Cherney at [email protected]