The global shortage of semiconductors is “being sorted out” after years of disruptions to supply chains that made them a scarce resource, according to the chairman of Swedish-Swiss tech and engineering giant ABB.
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Asked whether supply chain issues with regard to semiconductors have been resolved, ABB’s Peter Voser said that he believes the worst of the chip supply crunch has subsided. “It was really an issue in 2022, specifically the first two, three quarters,” Voser told CNBC at the World Economic Forum in Davos, Switzerland. “This was a real shortage on semiconductors, which affected us a lot because clearly when you’re in electrification automation and robotics, one of the key components is semiconductors, and we are using quite complex ones, so therefore Taiwan is very important but also Chinese semiconductors,” he added. “But if I look today at it, I think it’s now being sorted out. I think global growth slowdown has helped on this as well, and now for the future I’m quite optimistic.”
Chips are the brains of electronic devices and can be found in a range of products from cars to home appliances to smartphones. They’re a core piece of much economic activity, so the limitations in supply have had a ripple effect on the broader economy. 2022 was deeply challenging for ABB, Voser said, with the coronavirus in China and its related disruptions to global trade hitting the company hard. During pandemic-related shutdowns, ABB was forced to close factories in China, while hundreds of employees had to live in factories due to strict curbs on public life, he added. “We still delivered in that sense but not at the full capacity,” he said. “We weathered the storms in a certain way.”
In 2023, however, Voser expects an improving outlook in China while the rest of the world experiences lower growth. “Now with the latest wave of Covid, I think that’s a different wave of Covid and dealing with the pandemic as we all know, I would guess that in a few months, this is over and [we are] getting into a more normal environment in China as well,” Voser said. “The rest of the world will see lower growth in 2023, I would predict, the first few months,” he said. “In that sense, I am of the school [that in] the second half, China will bounce back and see growth which is higher than anticipated.”
In the semiconductor space, slowing economic activity has helped balance out the shortage as a rise in the cost of living resulted in a softening of demand from consumers for pricey chip-equipped goods, according to Voser. “I think with the global CHIPS act in U.S., investments in Europe, we will see more. Most probably, we are going into a capacity overhang pretty soon if the economy grows slower than anticipated,” the ABB chairman said. One thing the chip shortage has highlighted is the dependency of manufacturers on components from East Asia. TSMC, the Taiwanese semiconductor giant, is by far the largest producer of microchips. Its chipmaking prowess is the envy of many developed Western nations, which are taking measures to boost domestic production of chips.
In the U.S., President Joe Biden last signed into law the CHIPS and Science Act, allocating billions to lure manufacturers to produce the widely used chips domestically. It has also sought foreign investments, convincing TSMC to spend $40 billion to produce more of its chips in the United States at two chip plants in Arizona.
Voser added, however, that brewing tensions between China and Taiwan were a risk to watch moving forward. “It’s a risk, I do not worry normally, I think it’s a risk you have to manage,” Voser said. “Having new sources of semiconductors across the world is very important, so you go from one supply source, Taiwan and then China into multiple sources and that’s where some of the investments are really critical.”
Automotive Sector
Automotive manufacturers are still dealing with the effects of the microchip shortage that began in 2020. Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions, told reporters that he believes the industry will see 2-3 million units cut from production in 2023. This figure highlights the continued production difficulties that manufacturers face. However, if Fiorani’s estimate holds true, it would mark a significant improvement for the industry.
More than 10.5 million vehicles were cut from production in 2021, according to Auto News. In 2022, automakers around the world cut an estimated 4.3 million cars from their production schedules. Losing 2-3 million units would still be a hardship for manufacturers, but it would indicate that supply chain issues are beginning to ease.
Many key players in the semiconductor industry are feeling positive about the direction of the chip shortage in 2023, according to a recent poll. Multinational accounting firm KPMG and the Global Semiconductor Alliance (GSA) conducted the 18th annual global semiconductor survey in Q4 of 2022. The poll asked 151 semiconductor executives about their outlook for 2023 and into the future. Of those executives, more than half represent companies posting more than 1 billion USD in annual revenue. Based on the results, the Semiconductor Industry Confidence Index for 2023 currently stands at 56 out of 100. This score indicates that a small majority of respondents have a more positive outlook for 2023 than negative.
The survey asked semiconductor executives when they think the chip shortage will subside. Of those, 65% said that they believe the shortage would end in 2023 while 20% said they believe that it would extend into 2024 or later. Around 15% of respondents said they believe chip supply and demand are currently balanced.
Executives were also asked when they believe there will be a net excess of semiconductors. Around 31% said they believe there will be a surplus by the end of 2023, while 24% stated that they believe there is already a semiconductor surplus. That means that over half of respondents think that we will see a surplus in this calendar year, if we haven’t already. However, 36% believe that the next surplus won’t happen until between 2024 and 2026, and 9% said they believe the industry won’t see a surplus at any time in the next four years.
The effects of the automotive chip shortage do not appear to have been evenly distributed between manufacturers. Some companies, such as BMW, Mercedes, and Volvo, reported no significant chip supply issues early in the second half of 2022. Others like Nissan, Hyundai, and Volkswagen said that semiconductor issues were improving at that time.
But many of the world’s largest manufacturers are still facing significant difficulties related to the microprocessor shortage heading into 2023. Honda, General Motors, Ford, and Toyota all reported significant chip supply issues in the second half of 2022. General Motors suggested that those issues would continue into this year.
In an interview, Jennifer Strawn explained why there doesn’t seem to be a consensus on when the shortage will end. Strawn currently serves as Executive Vice President of Global Solutions and Sourcing at Rand Technology, a leading global sourcing and supply chain solutions company.
“While the chip shortage is improving, there is still uncertainty about semiconductor supply availability,” she says. “Increased buying during the peak of the electronic component constraints and decreased demand for consumer electronics at the end of 2022 left many [original equipment manufacturers] OEMs and contract manufacturers with an imbalance of inventory.” Strawn observes that this has resulted in some companies being more affected by the shortage than others, hence the varying outlooks. “In some instances, they have a surplus,” she says. “However, many are still missing the ‘golden screws’ – the parts needed to complete production.”
The number of vehicles cut entirely from production schedules doesn’t tell the entire story, either. Some automakers have been able to limit the number of vehicles cut from production by rationing the chips they use, removing some features that rely on microprocessors.
Mercedes-Benz, for example, removed features like premium audio and wireless phone charging from several vehicles. General Motors got rid of the assisted-driving feature Super Cruise from its Cadillac Escalade, along with vented and heated seats on a few of its trucks and SUVs. BMW removed parking assist and even touchscreen functions from several models. The company also pulled the semi-autonomous driving feature from the X3, its most popular model.
In many cases, these companies offered reimbursements for the lack of these features. Drivers who bought these cars may also be able to retrofit some of the features when the chip shortage diminishes. Predicting the end of the microprocessor shortage is difficult because of the complex and global nature of the supply chain. There are a number of variables that affect manufacturing and distribution throughout the world.
Businesses in the semiconductor industry have responded to the shortage by investing in increasing their manufacturing capacity. In Germany, Bosch invested more than $1 billion in 2022 to help ramp up production. The company also has plans to spend another $3 billion towards expanding its production capacity in the near future.
In 2023, semiconductor manufacturers aren’t just trying to meet current demand. They’re also trying to fill backorders resulting from the last several years of issues. Even with increased investment and capacity, doing both simultaneously presents a serious challenge. In other words, one of the main obstacles to the recovery of the supply chain shortage is the shortage itself.
The chip shortage presented at the same time as demand for microprocessors began rapidly increasing. Despite the recent setbacks, the long-term outlook for the semiconductor industry remains strong in part due to automotive manufacturing needs. An 2022 analysis from McKinsey estimated that the auto industry accounts for roughly 20% of microprocessor demand.
Russia’s invasion of Ukraine in 2022 has had a significant impact on the supply chain. Before the invasion, Ukraine was one of the largest suppliers of several raw materials used in semiconductor manufacturing, such as neon gas. Ongoing conflict has limited the country’s ability to capture, process, and export these materials.
The phrase “new normal” has long past worn out its welcome, yet it pertains here as well. Perhaps a better question is not “when will the chip shortage end?” but “when will the next evolution of the semiconductor supply chain begin?”
