The semiconductor shortage will drive an investment boom

The pandemic has caused a semiconductor shortage, and now governments are keen to create their own domestic microchip manufacturing sectors.

“Microchips, long revered as the brains of modern society, have become its biggest headache,” says Andrew Blum in Time. Pandemic-induced shocks to the semiconductor supply chain are “wreaking havoc” in surprising places.

When car sales plummeted early in the Covid-19 outbreak, carmakers cut orders for parts, including computer chips (a typical car contains more than 1,000 chips). “Manufacturers saw the slack and shifted their output to serve the surging demand for consumer electronics, such as webcams and laptops”. Now car sales are snapping back, but car firms can’t get enough chips to meet demand and so vehicle output this year is expected to be 3.9 million units (4.6% of global production) lower than it would otherwise have been.

The shortage should peak in the second half of this year, says Pat Gelsinger, the chief executive of chipmaker Intel, on Bloomberg. However, the chip industry is unlikely to be “back to a healthy supply-demand situation until 2023”. He forecasts strong growth in demand over the next decade, unlike some industry peers, who expect this crunch to be followed by a slump.

But the outlook for this cycle may not be solely determined by market forces. “The strategic importance of the semiconductor industry is on the rise,” says Ma Tieying of Singaporean bank DBS. Policymakers have seen that “a country’s access to cutting-edge chips could have far-reaching implications for national security”. Hence America’s efforts to restrict China’s access to advanced technologies will push China to expand its domestic industry.

Meanwhile, the US – which relies on imports from South Korea and Taiwan – is keen to encourage firms to build new factories on its own soil. Expect “a massive, government-led investment cycle” – and a risk of supply gluts in the mid 2020s.

Recommended

When investors get over-excited, it’s time to worry – but we’re not there yet
Sponsored

When investors get over-excited, it’s time to worry – but we’re not there yet

When investors are pouring money into markets, it can be a warning sign of impending disaster, writes Max King. So how are fund flows looking right no…
26 Oct 2021
An investment trust that gives exposure to frontier markets
Investment trusts

An investment trust that gives exposure to frontier markets

An investment trust investing in small, illiquid emerging markets has disappointed, but deserves another chance, says Max King
26 Oct 2021
What does Rishi Sunak have in store for investors this Wednesday?
Budget

What does Rishi Sunak have in store for investors this Wednesday?

Rishi Sunak is unveiling his spending plans for the economy this week. John Stepek analyses areas which may be most hit by the budget.
25 Oct 2021
How rising interest rates could hurt big tech stocks
Tech stocks

How rising interest rates could hurt big tech stocks

Low interest rates have helped the biggest companies to entrench their positions. But what if rates rise?
25 Oct 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021