The global shortage of chips is threatening the economic recovery

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ZDNet

July 12, 2021

The impact of the global shortage of chips is starting to have a direct impact on economic growth: new figures show that the UK’s GDP is stumbling, in part driven by cuts in the manufacturing of products that require semiconductors.

The Office for National Statistics (ONS) has published its latest measures of economic activity in the country, which show that GDP has grown by 0.8% in May 2021 – a boost mostly linked to the lifting of some COVID-19 restrictions, but which doesn’t compare well to previous months, when the economy grew by up to 2.4%.

While many indicators seem to be in the green, with accommodation and food service activities growing by more than 37%, the manufacturing of transport equipment fell by a striking 16.5%, which the ONS said was due to the shortage of microchips that power the electronics that make up most modern-day cars.

This falls in line with a report published earlier by the Society of Motor Manufacturers and Traders (SMMT), which showed that this May, car makers in the UK produced less than half the number of vehicles than they did at the same time before the pandemic.

Automotive companies have been struggling to get their hands on semiconductors for a few months now. The COVID-19 pandemic, in effect, drove up demand for electronic products like PCs and tablets that require large numbers of chips, and the handful of major semiconductor manufacturers that most companies rely on for supply have rapidly run out of sufficient capability to meet such heightened demand.

At the same time, the pandemic shut down vehicle factory lines, as governments implemented strict stay-at-home rules, meaning that car makers canceled their semiconductor orders. Now that production has picked up again, therefore, automotive companies are finding themselves at the end of the queue for new chips, far behind higher-paying consumer electronics producers, and are facing huge lead times for the components they need to manufacture cars.

The issue is not UK-specific. Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics, explains that the trend has been spreading across most developed economies.

“In the automotive sector, at least in Europe, which is one of the areas where it is most prevalent, there is a big wedge that is driven between strong new orders and weak production,” Vistesen tells ZDNet. “It suggests that automakers simply don’t have the supply in key components they need for their products.”

Leading car manufacturers in the UK and across the globe have drawn attention to the problem in their latest earnings reports. Jaguar Land Rover, for instance, highlighted a strong recovery in demand for vehicles that has been thwarted by a “difficult” shortage of semiconductors, which the company reckons will result on wholesale volumes about 50% lower than planned.

The firm previously had to temporarily shut down its two main car factories in the UK because of the lack of components, and was promptly followed by BMW, which suspended production at its Oxford Mini plant for three days.

Daimler has also acknowledged that the shortage of semiconductor components is affecting global deliveries, and expects the issues to continue to impact sales in the next two quarters. Volkswagen, for its part, anticipates that the bottleneck in semiconductors will affect the company in the second half of 2021.

Circumstances specific to the automotive industry mean that the sector has been particularly hardly hit, but economists forecast that the shortage is set to expand to many more products – and not only in transport.

“Transport equipment today, whether it is trains, cars, planes, or defense and security equipment, includes very technical software that requires semiconductors,” says Vistesen. “In that respect, all kinds of high-end, high-value added manufacturing equipment could be hit by this, especially in the transport sector but also increasingly in industries like medical equipment.”

And in consumer electronics, manufacturers are also preparing for delays in the production of items ranging from smart home equipment to basic household appliances like microwaves and refrigerators.

It is hard to tell when the supply of semiconductors will be sufficient to meet demand again. Vistesen expects the shortage to continue throughout the next two quarters, and some experts even believe that the crisis won’t subside before well into 2022.

Ramping up the production of semiconductors seems to be the most obvious solution, and major chip manufacturers are already investing to expand their capacity. Governments, too, are making pledges to increase the supply of components, with the Biden administration, for instance, committing a hefty $52 billion to boost chip making.

Despite those huge investments, chucking money at the semiconductor manufacturing industry is unlikely to resolve the immediate problem anytime soon. Building chip factories is a complex, time-consuming task – and new builds shouldn’t be expected to start producing at least for the next two years.

“You can’t snap your fingers and increase manufacturing,” says Vistesen. “We have to assume it will be harder than we expect and it will take longer.”

And as buying semiconductors gets ever-harder, Vistesen expects that companies will start hoarding the precious components to secure their supply chain. This could create a vicious circle in which access to chips is even more constrained, and although the trend, for now, is mostly anecdotal, the economist anticipates that it could aggravate the issue even further. For the automotive industry, therefore, the next few months are set to become even more challenging.