Sunday, September 26, 2021

    Understanding the markets this week: September 13, 2021


    Check the supply chain: we’re out of chips

    The pandemic has challenged companies in many ways – and global supply chain problems are among the greatest threats to global economic growth and contribute to inflation. As we discussed in this room at the start of the waaaaaay pandemic, if a part is missing to assemble a product, the entire product may be put on hold. Think of a steering wheel for a car: no steering wheel, no car. But in modern times we have discovered that cars run on chips. (Semiconductor shortages were also cited as the culprit.)

    The move to more electric vehicles increases the challenge for chip supply. From this CNBC post …

    “The shortage is said to have been exacerbated by the switch to electric vehicles. For example, a Ford Focus typically uses around 300 chips, while one of Ford’s new electric vehicles can have up to 3,000 chips. “

    And the problem goes beyond chips. “You find bottlenecks or constraints everywhere,” says Ford Europe Chairman Gunnar Herrmann in the same post.

    Supply bottlenecks could reduce global vehicle production by around 5% in 2021 compared to 2020 levels. In the UK, vehicle production fell to its lowest level since 1956. And the UK is producing more electric and hybrid vehicles. That eats up more chips. From this post …

    “Approximately 26% of the cars built by UK manufacturers in July were either battery electric, plug-in hybrids or hybrid electric cars, SMMT [the Society of Motor Manufacturers and Traders] said, adding that this is a new record. UK car factories have produced 126,757 of these products since the beginning of the year.

    We’ll keep an eye on this chart and the search for chips. Car sales figures courtesy of Liz Ann Sonders of Charles Schwab:

    And while the pandemic has created its own supply chain problems, the chip scarcity and semiconductor challenge are not a new occurrence. The modern (technological) world runs on chips. We need these chips in everything from our smartphones to our dishwashers to our vehicles. Chips are a necessary commodity, perhaps not much different in practice than in a nation that requires oil and natural gas and other materials. From this time link …

    “In 1990, 37% of chips were made in American factories, but by 2020 it was only 12%. All of the new pieces of the growing cake had gone to Asia: Taiwan, South Korea, and China. Chip fabs are not just factories, they are the linchpin of American independence. “

    The geopolitical risks are massive. Relying on someone else’s chips is the same as relying on someone else’s oil. Stop the flow of chips and you will stop the flow of information and economic development.

    We certainly know that nations went to war for oil.

    The US and other nations recognize the need to be more self-sustaining on the chip front. A new bill in the US addresses the concern and urgent need. From this Zeitpost …

    “If the US Innovation and Competition Act makes its way through the House of Representatives and becomes law, billions of federal dollars will pour into the semiconductor industry – already one of the most profitable. But it will take years to convert those investments into new chip factories, new chip designs, and a new pipeline of talented engineers. …


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