The semiconductor shortage will drive an investment boom

“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.

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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.