The news
President Biden has mandated a 100-day review of supply chains for critical materials, with the aim of eventually increasing domestic production of these materials. The review includes semiconductors, which are in serious shortage and delaying production lines. US semiconductor firms account for 47% of global chip sales but only 12% of production. Reasons for the shortage are:
TSMC expects to spend $25-$28bn in 2021 to make advanced chips, 45-63% higher than $17.2bn in 2020. The surge in capital expenditure points to longer-term growth opportunities.
We do not expect a quick fix in the near term. Expanding production capacity takes months or years. The lead time from equipment orders to actual output is estimated to be 9-12 months. We also expect Biden’s tough policy on China to stand. This implies that production constraints could continue to weigh on chipmakers’ sales potential through 2021.
However, we remain positive on the sector’s longer-term outlook. As production ramps up over time, backlog orders should lift sales. Inventory-building by customers to safeguard supplies may also spur demand. Some chipmakers such as TSMC and NXP Semiconductors are already raising prices due to tight supply. We believe their price hikes may be sticky and hard to reverse even when supply constraints ease. This may then translate to higher margins.
Longer-term trends
Despite supply-chain disruptions, global semiconductor sales were resilient in 2020, growing 5.1% YoY (Figure 3). This was a by-product of mobility restrictions and remote working. Global semiconductor sales are projected to increase 8.4% YoY in 2021 to US$4.69bn, from US$4.33bn in 2020, sustained by ongoing demand from new end-users.
