The Chips Are Down: Risks And Opportunities

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The global semiconductor shortage is wreaking havoc in global industries, creating opportunities for ASX-listed companies.

-The new oil
-Some Australian companies particularly exposed to shortages
-Others may find a silver lining to the chip cloud 

By Nikhil Gangaram

As the proverbial song goes, “from little things, big things grow”.

In this particular case, the "big things" are billion-dollar losses as companies around the world suffer supply-chain problems. The catalyst: the humble semiconductor.

In today’s hyper-connected world, semiconductors (known as chips) are essential building blocks that allow electronic devices to process data. 

A shortage of semiconductors has sent shock waves through the global economy, squeezing supplies of everything from headphones to engineering equipment, making them a hot commodity.

Globally, car companies alone have had roughly -US$80bn wiped from their bottom line.  

This scarcity has huge and varied direct and indirect implications for the bottom line of many companies listed on the ASX.

But it also presents a unique opportunity for a handful of Aussie companies.

The new oil

Akin to the importance of oxygen to humans, semiconductors are integral to all high technology devices, from phones and laptops to medical devices and aircrafts.

Modern automobiles require more than 100 chips and related electronics, and reliance is expected to increase with the evolution of electric vehicles.  

The current shortage in semiconductors has stemmed from plummeting supply and a huge hike in demand.

Fuelled by the COVID-19 pandemic, factory shutdowns and social distancing requirements have disrupted production, throwing international supply chains into disarray.

Early signs of fluctuating supply led many companies to stockpile and place advance orders for chips.

Consumers working from home exacerbated the problem as they flocked to gather computers, web-cams and consoles.

The global shortage goes beyond simple supply and demand economics. There are many layers of complexity that have made it harder for manufacturers to accelerate production.

Despite generating more than $110 billion in revenue each year, the semiconductor industry is structurally inflexible, with the majority of supply largely reliant on just two companies.

According to data by Taipei-based research firm TrendForce, Taiwan’s TSMC makes up more than half of the semiconductor manufacturing industry, followed by South Korea’s Samsung.

Another issue is the manufacturing process.

In addition to consumer technologies, semiconductors are vital to defence and critical infrastructure systems so the industry requires intellectual property protection.

It takes years to design and build a foundry capable of engineering chips so there is no ‘cookie cutter’ approach to increasing supply.

Logistical headaches have compounded the situation within shipping costs soaring in the past few months.

The ripple effect

Given their critical nature, semiconductors feed into multiple industry value chains. As a result, hiccups from supply chain issues have trickled onto some companies listed on the ASX.

Many listed companies in Australia directly or indirectly rely on the industry.

For example, medical device company ResMed ((RMD)) has reported that it is struggling to deal with the supply gap.

Chip shortages have constrained the company’s ability to step up production in the short term. As a result, ResMed has been unable to keep up with unprecedented demand for its devices, and says supply-chain constraints could last throughout fiscal year 2022.

Telstra ((TLS)) is another example. The telco relies on the output of chip-laden handsets, routers and wireless base-stations. Embattled AI company Appen ((APX)) is also heavily reliant on growing demand for cloud devices and AI chips to provide demand for their machine learning services.

Despite a buoyant used-car market, Eagers Automotive ((APE)) may suffer delays in the supply of many brands given car manufacturers have borne the brunt of the chip shortage.

In turn, reduced supply could slow automotive container demand which might impact the likes of Brambles ((BXB)).

Adversity offers unique opportunities for Australian companies

Apart from the medium-term disruptions, the shortage of semiconductors could provide a unique opportunity for some companies listed on the ASX.

Lessons from the COVID vaccine import issues have highlighted how reliant Australia is on importing critical components such as semiconductors. So much so, a recent report from the University of Sydney Nano Institute has labeled Australia’s dependence on other countries for supply as a "sovereign capability risk".

According to the report, Australia’s semiconductor sector has become more of a consumer of products than a value-adding participant.

Despite lagging in semiconductor value creation, there are some listed companies that could offer investors exposure to growth in the semiconductor industry.

Brainchip ((BRN)) has long been dedicated to developing its Akida Neuromorphic Processor, which has various applications including infrastructure and the health sector.

Weebit Nano ((WBT)) is another player with its flagship ReRam chip designed to support a wide range of wearbles and devices.

Most recently, Archer Materials ((AXE)) has also made headlines after securing a patent in the US for its CQ quantum computing chip.

Australia’s only semiconductor ETF, ETFS Semiconductor ((SEMI)) also presents a lower risk option for investors looking to participate in the sector.

A new hope

Although there are many hurdles to participating in the semiconductor value chain, the sector offers tremendous growth opportunities.

The semiconductor design industry generated global revenues of US$466 billion in 2020 and industry experts expect growth of 5% over the next 5 years.

Moore’s law says the number of transistors on microchips double every two years, so markets can expect exponential growth as 5G drives the demand for next-gen technologies.

Although there are high barriers to entry, the current market presents an opportunity for Australian investors and companies alike to enter and prosper in the global semiconductor value chain. 

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