How semiconductor plays as a crucial element for economy
Date: March 2022
Author: Parichart Jiravachara
Partner | Risk Advisory
Contributor: Tasada Sangmanacharoen
Consultant | Clients & Industries
The surge in demand of smart devices, automotive, and other products enhanced by chips has caused a series of manufacturing delays and shutdowns. As a result, reports of customers waiting as long as 20-52 weeks for various type of semiconductors, have ultimately yielded to plummeting revenue globally in hundreds of billions of dollars.
Geopolitical risks have also played a significant role in lowered chip supplies, specifically when the Trump administration began tightly regulating sales of semiconductors to Huawei Technologies, ZTE, and other Chinese companies, which they later began stockpiling chips essential to 5G smartphones and other products. Meanwhile, American companies were cut off from chips made by China’s Semiconductor Manufacturing International Corporation after being blacklisted by the federal government.
In the attempts to alleviate the shortage problem, automotive manufacturers and medical device producers have been in talks with the Biden administration to subsidise new U.S. semiconductor manufacturing capacity. While Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest semiconductor manufacturer, has also increased its 2021 capital spending budget to $28 billion. However, the process of building a new semiconductor fabrication plant requires at least five years.
The above circumstances have all been a contributing factor leading to the world’s ongoing semiconductor shortage. According to Deloitte, many kinds of chips are also predicted to be in short supply throughout 2022, with some component lead times pushing into 2023, but it will be less severe than in most of 2021, and it will not affect all chips.
The Semiconductor Industry Association reported that in 2020, global semiconductor sales rose 6.6% to US$440 billion, even though global GDP contracted 3.5%. This size and value imply the role that semiconductors play in global products and operations, or the economy in general, are important to leaders across industries.
One way to measure semiconductors’ importance to economy is measuring sales as a percentage of GDP over time, which also takes into account effects of inflation, economic growth, and recessions. This approach shows global chip revenues doubling in importance relative to GDP over the last three decades, from 0.25% of global GDP to over 0.50% in both 2020 and 2021 (forecasted).
Semiconductors may contribute to only a small percentage of global GDP, but they power trillions of dollars of goods and processes. In addition to the rising global demand, semiconductor demand is also heavily driven by digital transformation and further accelerated by the pandemic. For instance, chip demand for both devices and data centers soared in 2020 and 2021. In early 2021, the pandemic caused PC purchases to shoot up by more than 50% year over year, while chip sales increased by 30% for cloud computing data centers .
In the automotive industry, as cars are becoming increasingly digitalised, the average car in 2010 contained US$300 worth of microchips. This will likely increase to more than US$500 in 2022, totaling over US$60 billion for 2022. Still, the early 2021’s chips supply chain issues have illustrated that a lack of critical chips could result to a US$61 billion shortfall in global automotive sales this year.
Semiconductor situation in Thailand
Meanwhile in Thailand, as an export hub for semiconductor parts, the industry seems promising as a result of rising global demand. Thailand’s 9M2021 export of electronic parts grew 8.2% YoY. The electronic parts industry in Thailand is mainly manufactured for export, totaling 80% of total local production, with midstream products such as integrated circuit, semiconductors, and printed circuit board.
SCB EIC also predicted that the export of Thai electronic parts would grow approximately 7% YoY, backed up by growing demand, an increasingly digitalised economy, and the work from home trend which may turn into the new normal.
In the longer term, Thailand’s electronic parts might play a higher role downstream, such as in automotive, healthcare, and electronic appliances, which would be both opportunity and challenge for entrepreneurs for research and development amid the fast-paced changing market.
Nonetheless, semiconductors shortages have also impacted Thailand’s downstream production, especially the automotive industry. The pandemic’s new wave in 2021 had accelerated further contributed to already increasing labour shortages and halted manufacturing productions for cars and parts, particularly in the second and third quarters. Toyota had ceased production in Thailand in July 2021, while AutoAlliance, the Ford and Mazda manufacturer, had shut its production for two weeks during June to July 2021.
This has lowered the 2021 estimate of new car productions in Thailand from 1.6 million cars, as estimated at the beginning of 2021, to 1.55 million cars, leading to a major loss in the opportunity for export to the recovering global economies.
Looking forward, for companies with products or operations dependent on access to chips, they might need to incorporate chip issues as part of short, medium, and long-term strategy, and look at how greater use of semiconductors might grow their markets. In addition, both sellers and buyers might need to rethink on supply chain sourcing and related activities which may potentially be disrupted by external factors such as the pandemic, and the Ever Given blocking Suez Canal shipping. With higher spending patterns, more powerful chips, and greater economic multipliers, there is no signal that the trends will flatten anytime soon.