The Take: Understanding Chip Market Dynamics

What’s News

Global semiconductor industry sales reached a record $555.9 billion, up 26.2% year on year, the U.S.-based Semiconductor Industry Association (SIA) said this week.

SAP’s Take

The record sales came as global chip makers ramped up production to meet demand amid a worldwide chip shortage that has impacted a wide range of manufacturers — including car makers in the U.S., forcing them to cut production, eliminate showroom discounts and raise prices.

New cars prices rose by 12.2% in the year to the end of January, while used car and truck prices jumped by 40.5% according to U.S. Department of Labor statistics.

“At the beginning of the COVID-19 outbreak, as the demand for cars plummeted, the automotive industry cut its forecast by about 13%,” notes Richard Howells, an SAP supply chain expert.

At the same time, he notes, there was a huge surge in demand for consumer electronics as working from home became the norm. This resulted in increased demand for additional bandwidth, improved audio equipment, new video lighting and high-resolution cameras.

The stay-at-home mandates and office closures also increased demand for home appliances such as televisions, washing machines and dishwashers. “This caused a surge in demand for semiconductors, and high-tech OEMs quickly seized the opportunity and increased their forecast to take advantage of the additional capacity,” Howells says.

“So when car sales rebounded in late 2020 and the automotive industry started placing new orders, they couldn’t get enough chips to meet the demand. It’s simple economics. If demand is higher than supply, it usually results in increased prices.”

For further insight, see SAP’s new whitepaper:
Maintaining Business Continuity
During Periods of Semiconductor Shortages

Adding to the uncertainty, there is no general consensus on when the chip shortage will ease, although most expect supply pressures to ease in the second half of 2022.

This week Herbert Diess, Volkswagen’s chief executive, said he expects a continued hit from a shortage of semiconductors this year, but believes the company should be able to ramp up production in the second half.

AMD’s chief executive, Lisa Su, said she believes the semiconductor industry is making progress in adding capacity. “I do believe that the first half of this year will continue to be quite tight. But the second half of this year, I think things will get a little bit better,” she told Yahoo Finance Live.

Joellen Perry, Head of Global Public Relations, SAP
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