Shortage of semiconductors, a challenge for 2022

The imbalance in the international semiconductor market is expected to persist in 2022, and with it, its adverse economic effects.

Carlos Marcelles de la Casa

The semiconductor industry has recently experienced a sharp increase in demand. Global sales revenues in the sector have almost doubled over the last decade and Asian economies have consolidated their dominance of the international market.

However, at the onset of the pandemic, the sector experienced two conflicting developments. On the one hand, semiconductor sales to the automotive industry (one of the world's largest in terms of revenue volume) collapsed internationally during the second quarter of 2020. On the other hand, this shortfall was offset by strong demand for computer hardware due to the shift to remote work, distance learning, and, to a lesser extent, increased demand for graphics cards dedicated to cryptocurrency mining. All in all, once the path of global economic recovery took hold, the supply of semiconductors is not being sufficient to meet this new demand that remains steady and, at the same time, the recovery of demand from the automotive industry.

The supply of semiconductors is not being sufficient to meet demand.

In addition, during 2020 there were several adverse events other than the pandemic, such as fires and droughts, which affected large manufacturing plants, aggravating the global semiconductor supply shortage. The most notorious example was the fire at the Japanese microprocessor factory of Renesas Technology Corporation, a joint venture of Hitachi Ltd. and Mitsubishi Electric Corporation and one of the world's largest producers. The fire halted 2/3 of the production of the factory, which directly supplies the global automotive industry, for a month.

Graph 1: evolution of average supplier delivery in the Eurozone. Source: ECB, 2021.

As a result, Eurozone manufacturers, while experiencing a recovery in demand as a result of the improved health situation on the continent, had and are having trouble sourcing semiconductors. Moreover, as supply had been directed elsewhere, semiconductor imports from the Eurozone declined substantially after the onset of the pandemic, despite being more resilient than total imports. However, their growth rates were lower than those of total imports during the recovery phase.

Although the share of input production in the technology and electronics sectors is not as significant, this sector is a key basic supplier and therefore any disruption is likely to spill over to many other economic sectors. Combined with shortages of other inputs (chemicals, plastics, metals and wood) and shipping disruptions resulting from bottlenecks in global supply chains, the shortage of semiconductor chips significantly increased supplier lead times (Figure 1). In particular, this was especially strong in industries that use semiconductors for production, such as automotive and technology equipment.

The shortage of semiconductor chips significantly increased lead times for Eurozone suppliers.

According to the European Commission's latest quarterly business survey, 23% of manufacturing companies in the euro area identified in 2021 a lack of material and/or equipment as a key factor limiting their productive capacity (Figure 2), which is currently well above the historical average (around 6%). The effects of these semiconductor bottlenecks are most visible in industries with a higher share of electronic equipment inputs, such as in the electronic components, electrical equipment, automotive and computer equipment industries.

Graph 2: Percentage of industries by country that reported material and/or equipment shortages as a constraint to their production capacity. Source: ECB, 2021.

So far, there is very limited evidence on the effects of semiconductor shortages on the evolution of the price chain. Upward price effects could result, for example, from a shortage of supply of goods, an increase in pricing power at different levels of the supply chain or from companies trying to pass on costs resulting from forced underutilization of production. Eurozone producer price inflation (PPI), in which semiconductors play an important role, has remained stable and low throughout 2021 (1.37% on average between January and November), although it reached 5.4% in December. In other words, 2021 closed with a PPI of 1.70%, a figure that falls within normal and expected ranges.

Semiconductor shortages are expected to persist in the near term. While major global chipmakers plan to expand production and boost their capital spending by nearly 74% by early 2022, both the complexity and time required to build new plants is such that industry headwinds are likely to remain throughout this new year.

Bibliography

ECB, (2021). The semiconductor shortage and its implication for euro area trade, production and prices. Consultado online el 29/12/21 en: https://www.ecb.europa.eu/pub/economic-bulletin/focus/2021/html/ecb.ebbox202104_06~780de2a8fb.en.html

Mezcua, Unai (2021). La crisis de los chips empuja al ERTE a 40000 trabajadores. Publicado en ABC el 29/4/21. Consultado online el 21/12/21 en: https://www.abc.es/economia/abci-crisis-chips-empuja-erte-40000-trabajadores-automovil-202104290116_noticia.html

The Economist, (2021). The chip shortage is a self-solving problem. Publicado en The Economist el 7/8/21. Consultado online el 29/12/21 en: https://www.economist.com/leaders/2021/08/07/the-chip-shortage-is-a-self-solving-problem