• The semiconductor shortage that blighted the car and many other industries in 2021 is easing, slowly and unevenly
  • One of the reasons is falling demand – a bad omen for the global economy
  • Firms that increased their semiconductor inventory during the shortage will have problems if prices fall sharply

The semiconductor shortage that hit many industries worldwide is easing. But it may not be the good news that it seems.

One reason for the reduced crunch is slowing global economic activity. Demand for semiconductor chips is falling, as both consumers and companies cut back on buying tech products. That’s a bad sign for the global economy.

Why is there a semiconductor shortage?

The lifestyle changes triggered by Covid-19 added to any already developing chip shortage. Many people working from home wanted to buy chip-hungry products such as laptops or new cars – a basic car will have 100 silicon chips, while electric vehicles or self-driving cars can have as many as 3,000.

Carmakers, in particular, were taken by surprise by this surge. In a landmark failure of forecasting, they assumed Covid-19 would suppress demand, so cancelled orders with chipmakers.

A surge in demand then combined with production disruptions in the complex, global supply chain that produces chips. Even with supply chains working smoothly, it can take eight months for a chip to go from raw material to a tested component delivered to the final customer.

The war in Ukraine also disrupted global supplies of the neon used in the lasers that etch silicon chips, 50% of which is supplied by two specialist firms in Ukraine – both of which stopped production.

With semiconductors now ubiquitous in many manufactured products, the knock-on effect of the chip shortage has been severe.

Late in 2021, a report by consultants AlixPartners estimated that the chip drought would cost the auto industry lost production of 7.7 million vehicles and revenues of $210bn. In April 2022, the head of ASML, a firm that makes chip-making machines, reported that a significant industrial customer was buying washing machines simply to rip out the chips for use in their own products.

Is the semiconductor shortage easing?

It’s slow, and uneven, but there are signs the shortage is easing. One of the first categories to see an easing was the kind of memory chip used in smartphones.

By June 2021, car makers reported improvements. Joerg Burzer, head of production at Mercedes, told Automotive News Europe that chip shortages are “nothing compared to what it was like last year.” The CEO of Volkswagen made similar remarks to workers a few weeks later.

The improvement is uneven and stuttering, however. Honda and Toyota still face a chip shortage, and some specialist chips remain in very tight supply.

In a mid-year economic update, Ana Boata, Allianz Trade's Head of Economic Research, noted that in the second half of 2022, "we should see less pressure" in supply chains due to a broad range of factors, including easing of the chip shortage.

What are the hidden messages?

Improvement in the semiconductor shortage is partly due to supply chains recovering as Covid-19 restrictions reduce, alongside falling demand in a slowing global economy.

  • Smartphones bought in 2020 and 2021 are not being updated by consumers
  • 2022 lockdowns in China have hit demand there
  • Consumers worldwide are suffering an income squeeze due to inflation and high energy bills

In June, analysts IDC reversed their 2022 smartphone market forecast from 1.6% growth to 3.5% decline.

More broadly, the slowing global economy is reducing demand across the board. Consumers are trimming spending due to inflation and companies are reducing investment in capital equipment such as robotics and automation because of higher interest rates.

Semiconductors are such an integral part of the modern economy that many economic forecasters use them as an early-warning signal. Tim Ghriskey, a senior portfolio strategist at Ingalls & Snyder LLC, told Bloomberg News: "What this weakness indicates is that the economy is slowing, and there's potential for a recession."

Matt Maley, senior strategist at Miller Tabak + Co, told the same news outlet: "It highlights a growing concern that the slowdown we're going through will turn into a recession."

Semiconductor inventory problems

The chip shortage was intensified by firms building semiconductor inventory. Some of these chips are held on consignment – the chip maker still owns the product even though it is stored at the customer's premises. But some of this semiconductor inventory has been purchased outright.

An easing in the semiconductor shortage could cause a swing in the other direction, with companies dumping unwanted chips on the market at a loss and prices falling rapidly.

Investment bank Jeffries has warned that “the forthcoming inventory correction could be quite sharp”.

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