Weekly Brief: Every Chip Shortage Has A Silver Lining

Weekly Brief: Every Chip Shortage Has A Silver Lining

over 2 years ago3 mins

The ongoing chip shortage is crippling industries and economies alike, but there might be a silver lining if you squint hard enough.

🕰 Recap

  • Many of the world’s biggest carmakers are being forced to cut production on the back of the global chip shortage
  • That’s starting to take a toll on countries’ manufacturing sectors and their wider economies
  • But there could be some relief in sight, as the world’s biggest contract chipmaker announced it was ramping up production for the auto industry

✍️ Connecting The Dots

The strong post-pandemic recovery has driven equally strong demand for consumer products ranging from cars to smartphones – and, by extension, the computer chips that go into them. But it takes chipmakers a long time to increase their factories’ output, and the supply of chips – which slowed at the height of the outbreak – hasn’t been able to keep up with that rising demand.

The resulting global chip shortage is crippling many industries, but none more-so than carmakers. They reportedly pay less than chip-dependent companies like those in the tech sector, which sends them to the back of a very long line. That means they’ve been forced to cut production, which could cost the global car industry as much as $110 billion in lost sales this year.

The damage is also starting to extend to national economies with big carmaking industries. Take Germany: output from its car industry has shrunk every month of this year, and data out this month showed that total industrial production unexpectedly shrank 0.3% in May from the month before. We won’t know the full damage for a few weeks, but it’s expected to dent the country’s second-quarter economic output.

The UK is struggling with contractions in the country’s construction and manufacturing sectors too, thanks in part to the damage the chip shortage is doing to British carmakers. Its economy grew just 0.8% in May compared to the month before – barely half what investors were expecting, and a marked slowdown from April’s 2% growth.

🥡 Takeaways

1. There’s one silver lining for car companies.

The chip crisis is denting carmakers’ sales, sure, but it’s also forcing them to adjust their strategies in ways that are helping them boost their profit margins. Both Jaguar Land Rover and Daimler have shifted their focus toward more profitable models, which is partly why the latter reported a jump in profit that blew past expectations this week. Ford, meanwhile, is putting more emphasis on lending customers money to buy pre-owned vehicles – a business that has a profit margin multiple times higher than its core automotive business.

2. There could be relief for carmakers in sight.

TSMC – the world’s biggest contract chipmaker – told carmakers this week to expect a sharp pickup in supply in the next few weeks, with the firm forecasting this year’s production of auto chips will be 60% higher than it was in 2020. TSMC warned that supply will remain tight into 2022, but that’s still more optimistic than a previous forecast from one of the world’s biggest electronics manufacturers, which predicted the shortage would last until 2023.

🎯 Also On Our Radar

Fresh data showed that exchange-traded funds (ETFs) are on the brink of having taken in more money in seven months than in any full calendar year. Around $489 billion worth of investor money has gone into ETFs this year – less than 2% shy of the $497 billion full-year record set in 2020. The data confirms that the long-term trend of investors switching to the cheap, easy-to-trade, and tax-efficient vehicle is showing no sign of slowing down any time soon.

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