Have Apple and Intel found the way around the global chip shortage?

Analysts were also looking for a steer on how the ongoing global chip shortage are affecting US chip makers. Pat Gelsinger, the group’s new chief executive, repeated the view that the problem is likely to persist into 2023. 

Have Apple and Intel found the way around the global chip shortage?

By Mark Robinson

The market had enhanced expectations for Intel Corp’s (NASDAQ: INTC) Q1 returns, at least judging by the number of upward earnings revisions this year. After strong showings from global rivals, the California-based group delivered revenues and a gross margin in advance of Wall Street expectations. Analysts were also looking for a steer on how the ongoing global semiconductor shortages are affecting US chip makers. 

Pat Gelsinger, the group’s new chief executive, repeated the view that the problem is likely to persist into 2023. Around $20bn (£14.4bn) has been allocated to build the group’s foundry capability, which probably would have been necessary regardless of the global supply shortfall. As Gelsinger points out “there are over 400m PCs running Windows 10 that are over four years old today, which is an enormous PC refresh opportunity”.

Indeed, demand for semiconductors, including high-end, technologically advanced versions, has grown steadily over the past decade in line with smartphone access. But demand for microprocessors surged through 2020, partly due to shelter-in-place edicts. That meant that an already tight supply/demand balance tilted decisively in favour the latter.

For some sector players, this imbalance has fed through to improved financial performance. Taiwan Semiconductor Manufacturing Co (TPE: 2330) recently upped its revenue-growth outlook for 2021 by a fifth in dollar terms, while ASML Holdings (NASDAQ: ASML), one of the biggest specialist equipment suppliers to semiconductor companies, has just revealed first-quarter sales of €4.4bn (£3.82bn) and a gross margin of 53.9 per cent, both well in advance of guidance.

In a call with shareholders after the announcement of the results, chief executive Peter Wennick attributed the strong results to “cyclical demand on top of the secular growth from the accelerated build up of the worldwide digital infrastructure”. Mr Wennick doesn’t think the trends are likely to let up any time soon.  

Fallout from the imbalance 

But while the semiconductor suppliers cheer the supply/demand imbalance, many of the world’s manufacturers are struggling and nowhere is this better illustrated than in the automotive industry. Jaguar Land Rover has become the latest industrial casualty of supply-side delays, having been forced to temporarily shut down production at two of its main UK factories.

The value of microprocessors as a proportion of overall production costs in the automotive sector has increased significantly over the past decade, a trend which could become more pronounced due to the large-scale roll-out of electric vehicles.

Figures from the Semiconductor Industry Association (SIA) show that global sales increased by 6.8 per cent year-on-year in 2020, giving a total value of $440bn. Given the extent of dislocation in the wider economy, a percentage rise of that magnitude seems extraordinary, particularly within a mature industry.

Security issues

But it isn’t just an industrial problem; there are security issues at stake. John Neuffer, SIA president and chief executive, lays bare the strategic dilemma: “the share of global chip production done in the US has declined from 37 per cent in 1990 to 12 per cent today, and that disparity will only intensify without US government action”.

And it is also true that advanced manufacturing in the sub-sector has become over-concentrated in the hands of an ever-dwindling number of fabricators.

As chips have become steadily more advanced for high-end applications in telecommunications and gaming, the costs of physical production have increased dramatically, essentially creating a prohibitive barrier to entry. The market isn’t exactly silted-up, but regulators may be hard pressed to avoid the kind of antitrust issues synonymous with some other tech sectors.

At the end of February, US President Joe Biden launched a 100-day review of supply chains critical to national security and public health, including those for semiconductors. The rationale behind the Biden review is also playing out on this side of the Atlantic.

The IC’s Nilushi Karunaratne recently outlined why the UK government has intervened in Nvidia’s (NASDAQ: NVDA) proposed takeover of chip designer Arm Holdings.

The Cambridge-based chip designer licences its technology to dozens of manufacturers across the globe, including Asian heavyweights like Samsung Electronics Co (KRX: 005930). And the UK tech sector has just received a welcome vote of confidence as it has emerged that Canadian chip developer Alphawave IP has chosen to pursue an initial public offering in London rather than on rival bourses in New York and Toronto.

Apple’s M1

How can corporations hope to get around future supply-side disruption? Well, it helps to have deep pockets. Deep enough to allow you to develop your own vertically-integrated systems. 

Apple Inc (NASDAQ: APPL) has just showcased a suite of new products that incorporate its in-house developed M1 chip, as the tech titan seeks to reduce its exposure to the global semiconductor shortage.

Not everyone has the financial clout to attempt to alleviate supply chain disruption by bringing design in-house, but it is not beyond the bounds of reason to suggest that large industrial conglomerates may even consider a foray into the market through M&A channels in a bid to guarantee supply.

Semiconductors have become the lifeblood of modern industry, so it is not difficult to understand why supply chain management in this area has moved beyond shipping, warehousing and logistics into the strategic realm.

Originally published at Investors chronicle