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In short: “Buy ASML quick”
Offcourse we already bought them last year but still we think it is a good buy. We are proud of our dutch company ASML. A spin-off of Philips and now world leader in chipmaker machines. We also have two major chipmakers in our protfolio NVIDIA and AMD but maybe even better is ASML the chipmaker machinemaker which almost has a monopoly on highend microchips. Lately we read a lot about the new shortage in microchips. When the corona crisis hit a lot of car companies cancceld their orders. The chip manufactorers moved to different markets like electronics (laptops, telephones etc. and now they can not supply the new demand. Many companies are struggeling to buy microchips driving prices higher. Here is a closer look at why carmakers are struggeling to buy chips and how to fix it:
The global shortage of semiconductor chips has caused chaos for carmakers over the past few months. The pandemic is to blame, but producers in various sectors ought to prepare for more complications. Semiconductor chips may be tiny, but the role they play in the global economy is huge. Around a trillion are made per year and they are critical components in the digital devices and products used by billions of people around the world every day. However, the global upheaval of the pandemic has prompted a supply chain crisis in the sector. The car industry, which is increasingly reliant on chips as it ramps up electric car production, has been by far the worst hit.
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The severe semiconductor shortage has forced the world’s biggest carmakers to make drastic production cuts in the early months of 2021. Last week, Ford said it could miss out on up to $2.5 billion (€2.06 billion) of earnings this year due to the crisis. Volkswagen, Nissan and Honda have also announced major production cuts. The sector as a whole could lose more than $60 billion as a result of the problem, which was caused primarily by a pandemic double whammy in March 2020. When car manufacturing hit the floor back then, demand for consumer electronics of all kinds soared as populations across the world were forced to stay at home.
Automakers understandably reduced production and chip purchases as the virus spread across the globe,” the Semiconductor Industry Association, a trade association representing the US semiconductor sector, said in a statement last week. “Chipmakers, meanwhile, saw surging demand for semiconductors used to enable remote health care, work at home, and virtual learning, which were needed during the pandemic.”
The chip sector pivoted as fast as it could to meet the change in demand but changing back has not been a smooth process. The thing to bear in mind is that semiconductor manufacturing factories are not very agile. So when you move them around, it takes them a while to switch from one thing to the other. There was a widely held belief within the chip sector that the car shutdown would last for much longer than it did. However, demand came roaring back much quicker than expected by the end of the third quarter of 2020.
World Semiconductor Trade Statistics sales data shows that global monthly sales demand for automotive integrated circuits (ICs), the chips most used in the car sector, plummeted in March 2020 and remained on the floor until May 2020. However, a classic V-shaped recovery then rapidly unfolded and by December 2020, monthly sales growth was higher than it was before the pandemic.
It turns out that the inventories the chipmakers had put aside for the car sector were not enough. As a result of that, because it takes quite a long time to switch one factory production line back to another, that’s why the shortage has occurred. The crisis has been brewing for more than six months but the extent of its impact is being felt most keenly now. While the shortage is essentially based on pandemic-related supply chain problems within the chip sector, the fact that it seems to have hit the car sector much worse than other sectors points to vulnerabilities within automotive supply chains. The automotive industry is a small customer (less than 10%) of the overall semiconductor volume and not used to securing semiconductor manufacturing volumes upfront, hence its current exposure to a shortage is higher compared with sectors that do secure production volumes with purchase orders well ahead.
Large carmakers and suppliers are long used to being dependent on individual suppliers and on just-in-time processes. However, their outsized influence on other components in the supply chain have enabled them to be highly influential in determining where they rank in terms of importance within those supply chains, should bottlenecks arise. That is not the case for semiconductor chips, where they are outranked in both size and demand for chips by tech giants like Apple and Samsung, who find it easier to secure priority. The situation is unknown for them.
With carmakers forecasting big chip shortage-related losses for 2021, the question is how long it will be until some kind of normality is restored. Restoring market balance takes time. Semiconductor manufacturing is not suited to rapid and large shifts in demand, since it takes time to ramp up semiconductor production. Making a semiconductor is one of the most complex manufacturing processes. But as always we at the-wiseguy.com are optimistic that the situation will even out sooner than expected.
As things normalize, you will see demand for automotive come back and you will see demand for consumer electronics normalize. That has been abnormally high for a year. However, the issue has highlighted the pivotal importance of chips for the global economy, and also how fragile the highly complex sector is to unpredicted headwinds. The shortage led German Economy Minister Peter Altmaier to ask his Taiwanese counterpart Wang Mei-hua to ensure that Taiwan Semiconductor Manufacturing Company, the world’s most valuable semiconductor company, would prioritize cars in the chip chain. Given how sensitive the German government is over offending Chinese sensibilities on Taiwan, this was a significant move.
Even if pandemic-related disruption does eventually subside, the industry is unlikely to settle into a period of prolonged calm anytime soon. The semiconductor sector grew 6.5% in 2020 and surging demand for faster, smaller chips is expected to increase as 5G networks come on stream, electric car production ramps up further, and Internet of Things (IoT) technology establishes itself. That will lead to consolidation — as seen this week with the takeover by Taiwanese silicon wafer maker Globalwafers of Germany’s Siltronic — and intense competition between the few heavyweights at the top. There is also a critical geopolitical element. China is spending billions to become a chip power in its own right, while the US has a battle on its hands if it seeks to retain its own place in the global pecking order. The possibility of trade tensions loom large. That makes the future of the sector look as complex as the tiny little microchips themselves.
The conclusion for us should be that the companies we invest in could profit from this shortage we just have to remain calm and ride out the storm. In one year we will see if our feelings are correct and if our three wiseguys will pay out. Please see the list of wiseguys for more details.