No end in sight to crippling shortage
At the crux of inflationary pressures and supply chain bottlenecks are semi-conductors.
Computer chips are in everything and the shortage started before the pandemic. Due to factory shutdowns at the height of the pandemics along with heightened demand for goods during the pandemic, the shortage has gotten progressively worse.
The genesis of the problem is that foundries were running full-out before the pandemic with little spare capacity remaining. The bust in memory chips in 2018-2019 cast a shadow over the industry with sales down 15% in 2019 and the industry was also caught up in the US-China trade war, leading to a scale-back in capacity.
Looking ahead, there are some major investments being made into re-shoring US production, with around $50 billion set to be invested in Arizona by Intel and Taiwan Semiconductor.
However those are long lead-time investments and more industries are facing a critical shortage of chips, leading to shutdowns at a time when demand continues to overwhelm supply. Susquehanna pegs the lead time for ordering chips at 20-weeks now, up from 12 pre-pandemic and that's steadily accelerated since January.
Argus highlights the issues among European facilities of carmakers with Audi, Daimler, Toyota and Volkswagen all set to close or contain plants temporarily.
Daimler said it was impossible to estimate when the backlog will clear while Volkswagen said this month that it could worsen.
One carmaker, which did not want to be identified, told Argus October-December would be the worst quarter for the semiconductor shortage, in terms of its impact on output.
It's baffling to me that governments and private enterprise could design, manufacture and distribute billions of vaccines in 18 months and yet this shortage is going to last more than two years.
Some good news came this month with Bosch opening a foundry in German but Harald Kroeger, a member of the Bosch management board said he expects the shortage to last "way into 2022."
As anyone who has bought a car recently knows, the shortage has given dealers unprecedented pricing power. It's similar in other industries, particularly electronics where discounts are gone.
The problem is that this all shows up as inflation and can feed into inflation expectations. However when the storm of chips arrive in 2023 and beyond, there's likely to be overcapacity (a classic boom/bust cycle) and that could send prices lower. So by the time the Fed gets around to hiking rates, prices have already be cooling, raising the possibility of a policy error.
