One late-blooming economic side effect of the pandemic is a growing global shortage of computer chips. This shortage has started to impact the car industry and other technology companies across the globe. So what does this actually mean for those semiconductor stocks and the economy in general?
Tom, Tim, and Brendan break it down for you in this week’s episode of the Mullooly Asset Management podcast. Enjoy!
How the Computer Chip Shortage Could Impact the Economy/Market – Transcript
DISCLAIMER: Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.
Tom Mullooly: Welcome back to the podcast. This is episode number 353. This is Tom Mullooly. Joining me today are Brendan Mullooly and Tim Mullooly. Hey guys.
Tim Mullooly: Hey.
Brendan M: Hey.
Tom Mullooly: So a running joke here in the office, is the lights went out last summer at the end of July, for a couple of days. I decided to order a generator. I was told it’ll be two or three weeks at the beginning of August. And two or three weeks became two or three more weeks at the end of September.
And then two or three more weeks in November. And then, finally, at the end of January, it was delivered. And then it was, “how do we get this thing installed?” But for four plus months, we were waiting and no one knew why. What was going on with this thing?
Tim Mullooly: But now we have some insight into what happened. There were articles in Bloomberg and we’ve been hearing stories, rumblings of this for a little bit now, how there’s a shortage of computer chips out there.
Tom Mullooly: Worldwide. So if you’ve been trying to order a refrigerator, a generator, a car, and I have another story to share along those lines, this is what’s going on. These chips are in very tight supply. It really started with the pandemic a year ago. People said, “hey, we have to shift to working at home.
So we need to order a laptop for everybody or computers” or if you’re running a school and you’re not set up for that, like a lot of schools were, it was… We had to get Chromebooks for everyone. So it was certainly a lot of demand all at once. The other thing that we found out, was everyone hopped on Zoom, but people didn’t have webcams.
Tim Mullooly: Right.
Tom Mullooly: They didn’t have microphones. So they were using those headsets from the nineties on how to connect on these calls.
Brendan M: Right. So a lot of demand for technology that helps people do things from home. And so demand they’re soaking up some of the semiconductors because you need them to do all these different devices. And at the same time you had companies cutting production on things like cars or appliances, things like that.
Because they didn’t know what kind of recession we were going to be heading into and what sales were going to look like for the next 12 months. So one thing that companies do, that produce goods at that point in time, is try to hedge their risk by not creating too much, because then they’re left with inventory and they can’t move.
Tom Mullooly: So Broadcom is one of the chip design companies, and they’re kind of involved at the entire… From end to end in the supply chain with all of this manufacturing. You know, we talk about manufacturing jobs, leaving the US this is exactly what we’re talking about.
These manufacturing jobs are no longer here. They’re global. And so what they said was, it had been right before the pandemic, “the delay was about 12 weeks to get delivery on semiconductor chips.” And now they have… Or by the end of the year, last year, they had said, “it’s now 22 weeks.” And that is not showing any signs of slowing down or getting shorter. That there are more and more delays that are coming with these things.
I think what’s what really opened up a lot of people’s eyes were the fact that even though you’ve got a lot of companies out there that are in the chip business, there’s really only two companies that make most of the chips. So there’s Taiwan Semi, Taiwan Semiconductor, and Samsung. That’s it. But they supply Broadcom. They supply Nvidia. They supply Advanced Micro Devices, AMD, they supply everyone.
And we’re finding out, now, that companies like Nvidia and AMD, they make the designs for the chips. They don’t necessarily build the chips. The chips get built in what’s called a foundry. And the two biggest foundries are owned by those two companies, Taiwan Semi and Samsung.
Tim Mullooly: Yeah. I feel like the pandemic exposed how different areas of the supply chain are extremely fragile. And we’re just starting to see the impact of that now in terms of semiconductors and chips and stuff like that. But we even saw it right in the very beginning, when you couldn’t get paper products or toilet paper or paper towels or Lysol wipes or hand sanitizer. Everyone was running to the store to grab and stockpile everything that they could.
So even on a local level, the supply chains were exposed because they couldn’t handle the stress test that was being thrown at them. And now we’re seeing the same thing on a global level with these semiconductor chips.
Brendan M: Yeah.
Tom Mullooly: So there’s more and more chips, semiconductor chips that are showing up in cars. Prior to the mid nineties, you didn’t get chips in cars. The dashboard kind of worked by itself with all of the different gauges. Now they just have, they used to call them dummy lights, because they would only come on when something was wrong.
But I learned a lot about the electronics that go into new cars now. I say new cars, but in the last 20 years, by watching this wahoo on YouTube. This guy, Scotty Kilmer, he’s got millions of subscribers. Scotty Kilmer, you should check him out on YouTube. He’s a mechanic. He’s probably almost 70 years old. And he always talks about just getting Toyotas and Hondas.
But even he started talking about all the electronics that you have in your dashboard. 40% of the car parts, now, are electronics. So when you have a problem, your engine in your Toyota or your Honda may run great. But if your electronics crap out, you’ve got a problem and it may take weeks to get the parts to replace them.
Tim Mullooly: So what has all of this meant for these companies in terms of their stocks and the market and these different sectors? Have we seen any indication that these are starting to impact car company stocks or semiconductors and stuff like that?
Tom Mullooly: I can tell you that just in the last couple of days, Honda said that they’re going to stop production at three different plants in Japan. BMW has been changing all of their shifts. Ford announced that they’re lowering their full year earnings forecast because of chips. And that’s going to extend into next year. Apple, yesterday when they announced their earnings, said that supply constraints, mainly chips, are crimping sales of iPads and MacBook computers and it’s going to knock three to $4 billion off of their revenues.
So car makers when you add up all of the different car makers, they’re now forecasting that they’re going to miss out on over $60 billion worth of sales this year, because they don’t have supply.
Brendan M: It just goes to show that predicting the future is hard. No shame meant by bringing this up. But they decided to cut production at a point last year and then all scrambled at the same time when they’re caught. So they cut back on production because they were worried people weren’t going to be buying cars because we’re going to be in a recession with the pandemic.
Maybe people not traveling as much. Who even is putting miles on their car and wants to buy a new one. Turned out that was not really the case. And people still wanted cars and things weren’t as bad as a lot of people expected them to be during the first quarter of 2020.
So then during the third and fourth quarter, they were all in the same exact position of having to then scramble back to their suppliers to ramp back up again for the demand that they didn’t anticipate would be there. And now that we’re on the other side of that in the first quarter of this year and they’re telling us that they’re just not going to meet the demand and that they’re shutting down production again, but for a totally different reason. So they made a call, they thought it was going to protect their business and it turned out to be wrong.
Tom Mullooly: We’ve seen semiconductor stocks do pretty well over the last few months, but now we’re starting to see semiconductor companies are now starting to hedge their words a bit in terms of their forecast for the future. And it’s not helping their stocks.
And while we don’t want to get into projecting what the future’s going to bring, when there’s a shortage, you think, oh, well, they can really… They can gouge their customers and charge whatever they want and tell them to wait. But you get to a point when there’s a shortage. Where a shortage will actually really hurt your business. I think that’s what we’re starting to see.
Brendan M: Things don’t always follow one another. So yeah, I actually pulled up… If you look in Google trends for the phrase, semiconductor shortage, there’s nothing. There’s no search activity. And then in January of this year, it starts to go vertical. Everybody starts picking up on, “hey, what the heck is going on here?”, and looking into this phrase, semiconductor shortage.
And if you look at the performance of that sector of the market overall, it doesn’t necessarily track. And so, again, you think, “all right, there’s a shortage, meaning supply demand imbalances. Maybe I can profit from that. Because if there’s a shortage, these chip makers should be more profitable moving forward, because they’re just going to raise prices because there’s an incredible demand.”
Hasn’t actually been the case. So, again, things don’t always work out the way that you would originally anticipate if you’re just factoring in. If this, then that, sort of conclusions. Just like the carmakers were doing last year.
Tom Mullooly: Right.
Tim Mullooly: Yeah. It’s pretty much the conclusion that we came to from everything that happened last year. The market doesn’t have to react the way you think it’s going to, to anything.
Brendan M: Right.
Tim Mullooly: And that was the case all throughout last year, in terms of what was going on with just the pandemic in general.
Brendan M: Right, you would think you don’t want to own a pretty economically sensitive area of the market like semiconductors. But in fact, you did last year, despite what was going on in the world. And as you progress onward from there, you reach a point where that no longer becomes the case or the news has already been factored into the price. And there’s not much left to do from there in terms of being a great area.
Tim Mullooly: Yeah. And I think over the last handful of years, we’ve gotten conditioned to think that the market doing well and these big technology names doing well, they go hand in hand, but that doesn’t necessarily always need to be the case. The major indexes are touching up on highs almost every other day. And we’ve seen technology companies not do that well, really, over the last couple of months.
So different areas of the market can pick up the slack and different companies in different sectors. It doesn’t necessarily mean that just because these technology companies might be working their way over a speed bump right now, that the market has to fall apart because there are no computer chips anymore.
Tom Mullooly: It’s interesting what happens when you see an industry or a company try to flex. Try to shift on the fly. So last week, Intel, which at one point was the largest chip company, not only in the United States but in the world. Last week, Intel announced that they’re going to spend $20 billion to build their own foundry. They’re not going to be reliant on Taiwan Semiconductor or Samsung.
They’re going to invest $20 billion to create this new foundry. It’s going to take years. We don’t even know, in a few years, if there’s still going to be a shortage or if they’re even making the right chips. It reminds me a lot of in the seventies, we got really long gas lines because of the gas shortages. And so all of the car manufacturers decided almost at the same time that the US auto consumer doesn’t want to drive those big tanks, those big Cadillacs anymore.
They want smaller, economical cars. And people, instead, started dumping their big Chevy’s and their big Cadillacs and replacing them with a Toyota Corolla or a Honda Accord or something like that. And so the US manufacturers tried to shift very quickly to making small cars.
That’s why we had the Ford Pinto, which didn’t really do very well. And it really hurt these companies. Because as the price of oil seemed to normalize going forward, once the back-to-back recessions were over. Into the eighties, people started wanting big cars again. And the auto makers just weren’t in a position to flex in the other direction. And so we’re going to find out what’s going to happen with these chip companies.
Brendan M: Yeah. Businesses like investors… People… Business and investing are obviously related, but businesses and investors have to make similar decisions about what the future is going to look like. And you have to weigh the benefits of doing what you’re doing, or if you were exposed… To some extent you can be fighting the last war. And if you’re always doing that, then you’re preparing for the thing that just happened. Not necessarily sure that’s a great way to look forward into the future.
But you obviously have to address things that were a problem for you in the past too. So you weigh those two things. So you hope that these companies, trying to pivot here, not relying on the big semiconductor producers that have burned them here in the moment, are not setting themselves up so far in that direction, that when that world they’re envisioning doesn’t exist, that they are no longer a viable business.
Tom Mullooly: It also tends to show you the pecking order when supplies get tight. Taiwan Semiconductor, 25% of their business comes from Apple. Making the chips for the phones and for the iPads. So 25% of their business comes from that. They don’t… While they make chips for cars, it’s not a significant portion of their business. So these car manufacturers are just being told, “you’re going to have to wait. You’re going to have to wait. You’re going to have to wait.”
And that’s all they can do. Couple of interesting stories I’ll share. Not too long ago, I decided that I was going to buy a Toyota 4Runner. And first thing I did was I looked for one that was coming off of a lease. And I found that people who own Toyota 4Runners, for the most part, they don’t let them go. There’s a very limited market for used cars right now.
Part of that is the supply. But part of it is when you get a good car, like a Toyota 4Runner or a good truck, people want to keep them. And so then I decided, “well, if everybody’s keeping them, maybe I’ll get a new one. And I’ll just keep that.” And while I’m sitting in the dealership, this was at the end of January, I overheard a salesman talking with a customer on the phone.
And he said, “I just heard that the chip factory in Japan, where the chips are made for the dashboard, that factory burned to the ground.” And that’s actually true. That’s a company called Renesas or maybe I’m mispronouncing it. Renesas… but chip producer for the auto companies actually did burn to the ground. There are no chips available. So there’s going to be delays this summer for new cars.
There’s going to be extreme shortages, it appears. I went over to the Honda dealership and were told pretty much the same thing, like, “look at the cars that are on the lot. That’s what we’ve got. We’re not anticipating getting a lot of deliveries of new cars.” So if you haven’t heard about this shortage of semiconductors, whether it’s been a delay to get a refrigerator or a generator like me.
Anything that’s got a chip in it, probably going to be a delay. I know we were told from our it provider here at the office, that if you need to get a replacement, workstation or PC, that it’s going to be somewhere in the area of 20 weeks to get a replacement. So hopefully your computers don’t crap out. That could be a problem.
Tim Mullooly: The good thing is, I think, if this problem persists, we’ve seen at least just over the last year, how resilient and adaptive different areas can be. So if it becomes a real problem, people will find different ways to solve their problems. It doesn’t necessarily need to be the same way that they’ve always done things. Innovation comes from desperate times for some industries.
Tom Mullooly: Necessity is the mother of invention.
Tim Mullooly: Yeah, exactly.
Tom Mullooly: Yeah. Okay. This is going to wrap up episode 353. Thanks again for tuning in and we’ll catch up with you on the next episode.
Don’t forget to check out this week’s episode of the Mullooly Asset Show!