The ripple effects of the pandemic are as many as they are surprising. Who would have thought that in 2021 the venerable Ford Motor Company would be forced to slash production by 50% because of a shortage of tiny silicon microchips?
Ford, as a public company, reports its financial results every three months. The latest such public confession was on Wednesday. Ford announced the period just passed was surprisingly good, but the upcoming year faces big problems.
Ford will send workers home and put its factories on idle because it will be producing 700,000 fewer cars in the next three months, a 50% fall in production. This comes on top of a 17% fall in production in the first quarter of the year.
That’s a monstrous change in output, and the company forecasts “limited opportunity to recover lost production within 2021”. They expect the chip shortage will last until 2022 and cost them $2 billion in lost sales.
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Australia’s second bestselling car is the Ford Ranger. Ford isn’t saying if supplies of that vehicle to Australia will be disrupted, but it seems likely we will bear some of the brunt of the enormous cut to production.
Meanwhile Apple — the world’s most valuable company — is also admitting it can’t access the computer chips it needs and will take a hit to revenue in the next few months. Not so much for its most advanced microchips, but the ones in laptops and iPads.
In other words, this microchip shortage, which has been bubbling away in the background for months now, is a much bigger deal than most people realised.
A handful of companies are surviving well due to their buffer stock. Toilet paper is a handy analogy. It ran out in 2020. At first there was a small shortage, but when word of a shortage is out there, people stock up. The same is happening with microchips. Companies are panic-buying stock of computer chips. Anyone who didn’t stock up in time is in strife, and Ford is a good example.
The original shortage of chips is traced to plant shutdowns during 2020, but it has worsened in 2021 thanks to a fire in a big chip manufacturing plant in Japan, combined with rising demand for microchips as people spent up on home computers to work from home, and leisure spending (iPad sales were up 79% last quarter).
The economic recovery has also created a resurgent new car market in the wake of the pandemic, plus 5G phones also require new chips, which is adding to demand. (So no, the shortage isn’t because Bill Gates is injecting microchips into people.)
What is a semiconductor microchip?
Silicon semiconductor chips are tiny groups of circuits printed on a chip made of a semiconducting substance. Substances such as silicon are called semiconductors because they don’t conduct as well as a metal like copper, but they’re not insulators either. The controlled flow of current through the circuits on the chip sends the information embodied in bits, bytes and kilobytes through a computer.
Because of their small scale, the production of semiconductors is a very delicate process. Tiny imperfections will ruin everything. This is why the industry is concentrated in a few major producers and why small backyard microchip shops are not able to pop up to fill the gap. Most chips are made by Intel or by Taiwan Semiconductor Manufacturing Company.
What does it mean for us?
For one thing, you’ve got a goldmine sitting in your driveway. Demand for cars has been extremely high since the pandemic, and that includes used cars. As the graph shows, used car prices are sitting about 35% above where they were.
Old cars continually get crashed and break down, so there’s always someone needing a new car. But if supply of new cars is disrupted — and Ford won’t be the only marque unable to run its factories at full momentum this year — used car prices could rise even further. Could be a great time to trade in your old Corolla and buy an e-bike!
The downside is that if you need a laptop or a TV or even a fridge (yes, everything has silicon chips in it now!), don’t expect JB Hi-Fi or Harvey Norman to be putting things on sale any time soon. The usual haggle is unlikely to work if the salespeople know that there’s no more stock coming.
The financially inclined may be wondering if the shortage of microchips means it’s time to invest in a chip company. But the answer is that you probably should have thought of that a while ago.
There’s an up-and-coming company on the ASX that’s investing in computer chip technology (albeit not precisely the kinds that are in shortage). It’s called Weebit Nano and its share price is up sevenfold in the last few months.
But beware: if the shortage of chips means companies make big investments in chip-making factories, the current shortage could be followed by a glut. Which would be good news for anyone who can delay their purchase of an iPad and a Ford Ranger for a year or two.
This article was first published on Crikey.