Exploding demand across a variety of goods from electronics to autos is getting short-circuited at the source, as a shortage of semiconductors grips businesses looking to meet orders. The Covid-19 pandemic brought with it a shift in the way Americans live, as a move to at-home work and leisure raised the need for electronics, and a surge in cash to consumers generated a pickup in orders for cars and other chip-powered products. A pervasive shortage has been driven by a multitude of factors that extend beyond demand. For one, a March fire at the Renesas plant near Tokyo dented supplies, with full capacity not expected to be restored until the end of May. Earlier in the year, weather-related outages at Texas manufacturers including Samsung and NXP Semiconductor also caused supply problems. Looking further out, some worry that tensions between China and Taiwan could impact the industry negatively as well. Taken together, the issue with the chips so essential and ubiquitous in everyday life is causing substantial consternation among corporate leaders. The semiconductor issue has been mentioned dozens of times in conference calls that executives have held with analysts since first-quarter earnings began in early April. While the accounts have been similar of order backlogs and concern for what it will mean for revenues, the prognoses differ. Unofficial consensus is that the delays could last six to 12 months. Some executives see the problem as a serious threat to near-term profitability while others viewed it as a good problem to have – demand outstripping supply is a positive sign for future growth. All of those who talked about the issue, though, said it is front of mind for a variety of industries. "The semiconductor shortage and the impact to production will get worse before it gets better," Ford Motor CEO Jim Farley warned. He added that issues across a spectrum of goods including chips "vividly spotlighted the importance of improving domestic supply chain for both our industry and our country." Ford warned that the chip shortage cut first-quarter vehicle volume by 17%, hitting free cash flow by $3 billion for the full year and meaning that second-quarter FCF "will be significantly negative." GM & Ford combined have warned that the problem could cost them $4.5 billion collectively this year. The issue in the $439 billion chip industry has had industry-specific ramifications. Steel manufacturer Nucor has been cranking up production to meet the demand, particularly from an auto industry likely to push out 16 million vehicles this year. "The shortage of semiconductors, severe weather impacts and other issues have hurt recent production volumes in the auto market," Nucor CEO Leon J. Topalian said in his call. "We expect the difficulties to continue into the third quarter. Even with these disruptions, our mills have been running full out to satisfy customer requirements from the auto sector." Chip independence Within the chip industry, multiple executives stressed the need for the U.S. to become less reliant on foreign manufacturing. The U.S. produces nearly half the world's chips, but still needs more. President Joe Biden has talked about a $50 billion plan towards ginning up its production infrastructure, but even with that the issue is likely to persist. "The unprecedented demand for semiconductors has stressed supply chains across the industry," Intel CEO Pat Gelsinger said. "We expect it will take a couple of years for the ecosystem to make the significant investments to address these shortages." "The investment needed at the scale required is immense, and it will require close industry and government partnership to address this need," Gelsinger added. The economic ramifications are important as well. With inflation already on the rise , shortages of goods like semiconductors, lumber, resin and other widely used products are going to add to price pressures. The headline personal consumption expenditures index rose 2.3% in March, its fastest increase in nearly three years, and Federal Reserve officials warn that coming months could see even higher numbers before inflation abates. Honeywell CEO Greg Lewis note that semis, steel, copper and ethylene are all products that saw "substantial inflation" in Q1 and said the company is watching price closely. "We're quickly taking actions. And, you know, we are staying ahead of it. And we're going to continue to model when that happens and stay ahead of it," Lewis said. "But it's a watch-out item." 'Golden age' potential From a macro perspective, analysts see the issue as the harbinger of an extended boom for producers. The U.S. is in the midst of an economic boom brought on by the ebbing of the Covid pandemic and some $5.3 trillion in government stimulus spending. Congress also is going through a wide-ranging infrastructure plan that could bring another $2 trillion or so into the economy, which is expected to grow at its fastest pace in perhaps half a century this year, depending on whose view prevails. With their critical role across a swath of industries, semis will be at the core of that growth once the shortage subsides later this year or early 2022. "Ultimately, the chip shortage is a high-quality problem for the industry, as it has been caused by demand recovering faster than expected," Morgan Stanley equity analyst Victoria Greer said in a recent note to clients. "Once the chip shortage issues are resolved, we see clear potential for restocking to support production growth" in North America. Similarly, ING chief international economist James Knightley said that after the chip issues pass, manufacturing "output numbers will grow strongly." Wedbush analyst Daniel Ives said the shortage is presaging what he sees as a "'golden age' for semiconductor designers and the bulk of the semi supply chain." However, April's ISM Manufacturing survey exemplified the challenges the issue is presenting in the near-term. While the headline index still indicated expansion, the reading of 60.7% represented slower growth from the previous month, with many respondents indicating key problems being finding labor and dealing with supply issues. "The current electronics/semiconductor shortage is having tremendous impacts on lead times and pricing," a respondent in the computer and electronic products industry said. "Additionally, there appears to be a general inflation of prices across most, if not all, supply lines." "Demand continues to be very strong. Supply chain delays hamper our availability and ability to sell more," a manager in the machinery sector said. S & P Global Ratings said recently it expects the shortage to last another 12 months. Until then, production is likely to remain slow while prices increase.
