The Chip Shortage in Context | WT Wealth Manangement White Paper

The Chip Shortage in Context | WT Wealth Management White Paper

One of the economy's biggest news stories of late has been about one of its smallest components: the computer chip (often referred to as semiconductors). As technology has become the driver in nearly every aspect of our modern lives, the computer chip has become as important a "staple" as toothpaste, Q-tips and toilet paper. And shoppers are feeling it.

The ongoing semiconductor shortage is creating headaches for manufacturing, retailers and consumers alike. While this problem might be easy to dismiss as a short-lived after effect of the Covid-19 pandemic, summer 2021 is nearly over and supply chain relief is still pending.

The Covid-19 pandemic spurred unprecedented demand for consumer electronics. In the first wave people purchased computers, monitors and other gear required to work and learn remotely from home. Then, Covid-19's second wave in the Fall 2020 was accompanied by a surge in home entertainment as game consoles, TVs, smartphones and tablets flew off the shelves.

A challenge to manufacturing

Most innovative technologies adopted by consumers today rely on semiconductors. Simple examples from your home include smart door locks, home security systems, thermostats, faucets and coffee makers. In fact, over the coming years we expect nearly every household appliance to have Wi-Fi integration and smart technology powered by semiconductors. Very few "daily use" items don't rely on semiconductors: think smart phones, watches, tablets, gaming devices and even automobiles.

It is important to keep in mind the long-term, exponential increase in semiconductor demand over the next decade, which will make the sector a high-growth investible industry for years to come. That being said, there are short-term supply-chain obstacles impacting chipmaker earnings and productivity today. To better understand the current situation, let's look at two areas of prolific chip shortage.

The Auto Industry

Production cuts in the auto industry and empty dealer parking lots have grabbed recent headlines. In the first half of 2021, Japanese carmakers reportedly reduced production by 500,000 units. And it is estimated that carmakers worldwide could lose $61 billion as a result of the chip shortage in 2021. Modern vehicles are increasingly reliant on semiconductors for advanced brakes, electronic components, steering systems and infotainment. So missing chips can easily stall production. Some carmakers have even resorted to manufacturing cars without chips and storing them in inventory as they await these critical ingredients.⁽¹⁾

While some analysts believe the chip shortage is due primarily to electronics manufacturers buying more chips, that's only part of the story. Another reason for the shortage is the fact that automakers canceled orders last year in the midst of the Covid-19 pandemic. When auto plants shut down, automakers reduced costs by delaying chip orders. That turned out to be a mistake when other industries were eager to accept the chips. Plus, as the impacts of the pandemic waned, stronger-than-expected demand for new vehicles outpaced production ability. The industry has yet to catch up. You'll see in the chart below that chip shipments correlate very closely with vehicle sales in the auto-industry.

PC Vendor Shipments and Vehicle Sales in 2020

PC Vendor Shipments and Vehicle Sales in 2020

5G

Plans to rollout 5G mobile-phone technology are already noticeably impacting computer chip demand. The higher data rates made possible by 5G are expected to be a driver of demand for advanced semiconductors. You can see in the chart below the linear correlation between chips and 5G subscriptions.

5G Chipset Market vs. Worldwide 5G Subscriptions

5G Chipset Market vs. Worldwide 5G Subscriptions

The shortage of semiconductors could create headwinds for 5G in the short run, but the actions of chipmakers suggest they believe these headwinds will not last long. Apple, which in April reported a blowout first quarter of $111 billion in revenue, told analysts it didn't have enough new iPhone supply to meet demand. However, more recently, CEO Tim Cook told Reuters that "semiconductors are very tight, but we are hopeful supplies will catch up to demand later in 2021." ⁽²⁾

Conclusion

The current trends in demand for semiconductor are indicative of the rapid pace of digitalization and the rise of disruptive, technology-focused innovations. The wide-reaching impact of the chip shortage across subindustries is a testament to how ubiquitous semiconductors have become. ⁽³⁾

The good news is that supply chains and manufacturing capabilities always catch up to meet economic demand. Currently chip manufactures around the world are increasing manufacturing capabilities to meet the projected demands of the next decade and beyond.

And that's a good reason why many of WT Wealth Management's investment strategies hold an allocation to semiconductors. We talk consistently to our clients about technology staples. Something as small as a computer chip has now become as fundamental as the more traditional staples you find in your bathroom.

Toothpaste, Q-tips, toilet paper and semiconductors... I bet you never thought you would hear that combination in the same investment white paper.

SOURCES:

WARRANTIES & DISCLAIMERS

There are no warranties implied.
Any opinions expressed on this website are the opinions of WT Wealth Management and its associates only. Material listed on this website is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. You should always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETF’s carry certain specific risks and part or all of your account value can be lost.

At WT Wealth Management we strongly suggest having a personal financial plan in place before making any investment decisions including understanding your personal risk tolerance and having clearly outlined investment objectives.

View Disclosure

WT Wealth Management is an SEC registered investment adviser, with in excess of $100 million in assets under management (AUM) with offices in Flagstaff, Scottsdale, Sedona and Tucson, AZ along with Jackson Hole, WY and Las Vegas, NV. WT Wealth Management is a manager of Separately Managed Accounts (SMAs). With SMAs, performance can vary widely from investor to investor as each portfolio is individually constructed and managed. Asset allocation weightings are determined based on a wide array of economic and market conditions the day the funds are invested. In an SMA, each investor may own individual Exchange Traded Funds (ETFs), individual equities or mutual funds. As the manager we have the freedom and flexibility to tailor the portfolio to address an individual investor's personal risk tolerance and investment objectives – thus making the account “separate” and distinct from all others we manage. An investment with WT Wealth Management is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Any opinions expressed are the opinions of WT Wealth Management and its associates only. Information offered is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. Always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETFs carries certain specific risks and part or all of an account's value can be lost. In addition to the normal risks associated with investing, narrowly focused investments, investments in smaller companies, sector and/or thematic ETFs and investments in single countries typically exhibit higher volatility. International, Emerging Market and Frontier Market ETFs, mutual funds and individual securities may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability that other nations experience. Individual bonds, bond mutual funds and bond ETFs will typically decrease in value as interest rates rise. A portion of a municipal bond fund's income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains (short and long-term), if any, are subject to capital gains tax. Diversification and asset allocation may not protect against market risk or investment losses. At WT Wealth Management, we strongly suggest having a personal financial plan in place before making any investment decisions including understanding personal risk tolerance, having clearly outlined investment objectives and a clearly defined investment time horizon. WT Wealth Management may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption. WT Wealth Management's website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of WT Wealth Management's website should not be construed by any consumer and/or prospective client as WT Wealth Management's solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the internet. Any subsequent, direct communication by WT Wealth Management with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A copy of WT Wealth Management's current written disclosure statement discussing WT Wealth Management's registrations, business operations, services, and fees is available at the SEC's investment adviser public information website (www. adviserinfo.sec.gov) or from WT Wealth Management directly. WT Wealth Management does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to WT Wealth Management's web site or incorporated therein, and takes no responsibility therefor. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

Contact Us Today