The Beginning of the End of the Shortage

Part 1: Jägerbombs for all?

Since my last blog post warning about those who were predicting a "new paradigm" of shortage in the semiconductor industry, the media have been shouting about the "chip crisis" alongside the typical daily news diet of disaster and calamity that we have come to expect in the time of COVID. The chip shortage coverage helped create a sense of national anxiety that we were all too reliant on China for semiconductors and, in general, that semiconductor supply was dwindling. The predictable response from governments around the world was to announce plans to stimulate their respective domestic semiconductor manufacturers into expanding chip production capacity.

Fast forward a few months, and we are now finally seeing some light at the end of the chip shortage tunnel. Yet, in the wake of all the proclamations and commitments about investing in new chip capacity, we also now see manufacturers going forward with actually starting to build new plants that won't come online for another couple of years. The result, as I said in my last post: overcapacity.

Now that many countries are starting to reopen their economies and very significant swaths of people are vaccinated and leaving their homes for the first time in 18 months, we have started to see demand for electronics begin to wane. Consumer spending is shifting from indoor devices to outside-the-house activities, whether that be bars and restaurants or travel. (Personal note: I still haven't gotten my Bronco yet. Hurry up, Ford.)

One example: LCD TV demand appears to be trending downward for 3Q21, and we can expect to see prices for LCD TVs start to decline in the fall (see what I did there?). But this situation is not unique to LCD TVs: The first half of the year saw a shortage of electronics generally, which caused electronics manufacturers to ramp up production with the expectation that demand in the remainder of 2021 would be similar to last year and the first half of this year.

But, once we all become vaccinated and feel safe to fist bump with friends again, what happens when demand for electronics falls to pre-pandemic levels (or lower, because of all the devices we splurged on during the pandemic)? Keeping consumers indoors for 18 months may have given the electronics industry a sort of economic Jägerbomb, stimulating production based on blurry expectations of future demand, but now what?

Part 2: The Hangover: Part IV

As a result, consumer electronic devices are an example of an artificially stimulated industry that is now on the cusp of waking up from its yearlong party with an epic hangover.

PCs are another victim of this consumer spending shift from indoors to outdoors. We are seeing declines in PC orders for both consumers and the private sector. Of course, that's not to say people will stop buying PC's or anything else with a semiconductor, but rather it does appear that the shortage is easing as we return to "normal" demand for electronics and semiconductors. Consider that TSMC announced about a month ago that they were reprioritizing their production away from electronics manufacturing to automotive and Apple.

Again, the shortage is not over, but we are at the beginning of the end of shortage.

Many electronics manufacturers are likely to see sales declines in the second half of the year, particularly for LCD TVs, PCs, and tablets. That said, electronics that were unavailable during the shortage will likely get a nice boost in sales as they finally come back into the market (I'm looking at you PlayStation and Xbox). As is typical, electronics sales normally spike as the holidays approach, but I would suspect that TVs and computers won't get much of a boost this year.

Again, this is my suspicion, not a forecast.

Part 3: What does this all mean?

In general, it is very likely that the second half of 2021 will see electronics purchases decline, negatively impacting electronics manufacturers' bottom lines. This also will spill over to semiconductor manufacturer's bottom lines. The semiconductor shortage will persist a while longer for some segments such as automotive, but as the semiconductor industry rejuggles its production priorities, we anticipate accelerating recovery timelines for the industry.

Looking further into the future, however, we are not yet concerned with semiconductor manufacturers are just starting to invest in new manufacturing, so we can still expect an overcapacity issue in about two to three years' time. However, hopefully it will be managed to better meet normalized yet growing demand as opposed to rushing into long term solutions for a short-term problem.

Conclusion: What did we learn?

Supply/demand should rebalance itself as demand comes off its Covid-induced peaks. But at the end of the day, automotive is the next semiconductor frontier.