Just as investors were looking the other way, with Chinese shares tumbling on fears of a major default in the property sector and US shares wobbling ahead of a crucial Federal Reserve meeting this week, the global chip crisis has reared its head once again.

A combination of weak demand and enforced factory shutdowns during the pandemic, followed by a faster-than-expected global recovery and soaring demand for technology, has left semiconductor makers struggling to keep up with demand.

NO QUICK FIX

Given the increased use of computer chips in everything from mobile phones and laptops to cars and trucks, finding a solution to the supply shortage has become a global issue.

German manufacturer Traton, a major player in the heavy truck market created through the merger of VW’s MAN brand, Sweden’s Scania and US firm Navistar, has warned vehicle sales this quarter will be significantly lower than planned due to parts shortages, in particular chips which power its control units.

The firm said severe difficulties in the supply of semiconductors have been ‘primarily attributable to rising Covid-19 cases in Malaysia and the lockdown that followed’. Malaysia is an important hub as many chip companies which supply the automotive industry have their production there.

To illustrate the severity of the problem, the firm said it was taking control units off vehicles which hadn’t sold and fitting them to vehicles which were on order to prevent delays in deliveries. Traton’s chief executive said he expects the shortage to continue into 2022.

The irony of global supply chain constraints hitting production of heavy vehicles, which are crucial to the running of supply chains, couldn’t be clearer. For the sake of a component costing a few pence, Traton and firms like it are losing hundreds of millions of pounds in sales.

US FUNDING PACKAGE

In the US, the Biden administration is taking the disruption so seriously it has convened several meetings with companies in the semiconductor supply chain in order to get them to help solve the bottlenecks in production.

In June, the administration proposed $52 billion in funding for domestic chip research and development as part of its wider bill designed to improve US competitiveness with China, but the bill has been stalled in the House by infighting.

Car production in the US is likely to shrink by 6% in the second half of this year with the decline extending into 2022 according to US parts maker 3M.

Some of the world’s biggest manufacturers including General Motors, Toyota and VW have had to cut production this year with VW chief executive Herbert Diess predicting the chip shortage could last ‘months or even years’ due to the strength of demand.

UK LESS AFFECTED

While the UK doesn’t have large exposure to auto manufacturing, there are a handful of firms such as Aston Martin Lagonda (AML), Melrose (MRO), Ricardo (RCDO) and TI Fluid Systems (TIFS) which are likely to feel the fall-out from the slowdown in global production.

Nor is there much direct exposure to semiconductors, with IQE (IQE:AIM) about the only remaining chip technology firm left quoted, but investors in UK-listed global technology funds with holdings in Dutch equipment maker ASML and US firms such as Broadcom, Intel and Nvidia should be well placed to take advantage of the situation.

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Issue Date: 22 Sep 2021