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Processor shortage powers chipmaker profits

A shortage of microchips may last for at least two years making the sector attractive for long-term investors.

A global shortage of all types of microchips is causing extended shutdowns at car plants, raising the prices of smart phones, TVs and other consumer goods, and causing delays in the launch of new products.

The squeeze will likely continue for another two years, IBM’s president Jim Whitehurst said recently. He noted that the global car industry is expected to lose US$110 billion of sales this year as a result and the tech industry is struggling to keep up with demand for chips in new products as the world economy reopens.

For investors, it means opportunities in the companies that design and make semiconductors. They are having a banner year and expect demand to stay strong in the foreseeable future. While those expectations are built into their share prices, the fundamentals support further share appreciation.   

Chip shortages have been caused by a perfect storm of factors that were accelerated by the pandemic, though not caused by it initially. In January 2020, many industries expected a cyclical slowdown, so inventories were drawn down. Two months later, the pandemic led to factory closures. For those remaining open, supply chain issues emerged as many of the chips are made in the Far East.

Then came a surprisingly rebound in May, led by all types of work-from-home needs – smart phones, laptops, tablets, connectivity software, and storage. So demand ramped up for simple chips such as the memory chips that store files on computers or save photos on a digital camera. It also put pressure on supplies of complex chips found in electric vehicles, guiding factory floor robots, and in cloud software and data analytics.

Automakers, who favour just-in-time deliveries over fixed contracts, are in the most trouble. They find themselves at the back of the line as the chipmakers supply companies with contracts.

Ford has halved its global production through June because of chip shortages They need microchips for infotainment and digital displays, power brake sensors, warning light indicators, and engine management. The price of new cars is 10% higher than two years ago, according to recent reports. Used cars are also hot commodities.

These trends explain why shares of leading manufacturers have soared along with their higher profits. That includes Taiwan Semiconductor Manufacturing Co. (NYSE: TSM), the world’s largest microchip maker, Samsung Electronics Co. Ltd., and Netherlands-based ASML Holding NV (NDQ: ASML), which produces the equipment these companies use to manufacture microchips.

Other beneficiaries are Intel Corp. (NDQ: INTC) and Advanced Micro Devices Inc. (NDQ: AMD) as repatriating manufacturing to the U.S. favours their operations. This is now seen as a national security issue as the cold war with China escalates.

In a sign of the times, the US Senate in a rare show of co-operation has advanced a $52-billion proposal to boost U.S. semiconductor chip production and research.

The bill would boost domestic manufacturing of the chips that power electronics and key parts of modern cars, trucks and SUVs, such as power steering and infotainment displays. It would also authorize funding for research and development of emerging technology, energy-related supply chains and NASA’s human landing systems program.

This is an edited version of article that appeared in the Internet Wealth Builder on May 31, 2021. 

Adam Mayers writes about investing and personal finance. He is a contributor to the Globe & Mail’s Globe Advisor and a contributing editor to Gordon Pape's Internet Wealth Builder newsletter. Adam was Business Editor and investment columnist at The Toronto Star and is the author of six books.

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