-Some Australian companies particularly exposed to shortages
-Others may find a silver lining to the chip cloud <\/strong><\/p>\n
By Nikhil Gangaram<\/p>\n
As the proverbial song goes, “from little things, big things grow”.<\/p>\n
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.<\/p>\n
In today’s hyper-connected world, semiconductors (known as chips) are essential building blocks that allow electronic devices to process data. <\/p>\n
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.<\/p>\n
Globally, car companies alone have had roughly -US$80bn wiped from their bottom line. <\/p>\n
This scarcity has huge and varied direct and indirect implications for the bottom line of many companies listed on the ASX.<\/p>\n
But it also presents a unique opportunity for a handful of Aussie companies.<\/p>\n
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The new oil<\/u><\/p>\n
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.<\/p>\n
Modern automobiles require more than 100 chips and related electronics, and reliance is expected to increase with the evolution of electric vehicles. <\/p>\n
The current shortage in semiconductors has stemmed from plummeting supply and a huge hike in demand.<\/p>\n
Fuelled by the COVID-19 pandemic, factory shutdowns and social distancing requirements have disrupted production, throwing international supply chains into disarray.<\/p>\n
Early signs of fluctuating supply led many companies to stockpile and place advance orders for chips.<\/p>\n
Consumers working from home exacerbated the problem as they flocked to gather computers, web-cams and consoles.<\/p>\n
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.<\/p>\n
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.<\/p>\n
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.<\/p>\n
Another issue is the manufacturing process.<\/p>\n
In addition to consumer technologies, semiconductors are vital to defence and critical infrastructure systems so the industry requires intellectual property protection.<\/p>\n
It takes years to design and build a foundry capable of engineering chips so there is no ‘cookie cutter’ approach to increasing supply.<\/p>\n
Logistical headaches have compounded the situation within shipping costs soaring in the past few months.<\/p>\n
The ripple <\/u>effect<\/u><\/p>\n
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.<\/p>\n
Many listed companies in Australia directly or indirectly rely on the industry.<\/p>\n
For example, medical device company ResMed<\/strong> ((RMD)) has reported that it is struggling to deal with the supply gap.<\/p>\n 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.<\/p>\n Telstra<\/strong> ((TLS)) is another example. The telco relies on the output of chip-laden handsets, routers and wireless base-stations. Embattled AI company Appen<\/strong> ((APX)) is also heavily reliant on growing demand for cloud devices and AI chips to provide demand for their machine learning services.<\/p>\n Despite a buoyant used-car market, Eagers Automotive<\/strong> ((APE)) may suffer delays in the supply of many brands given car manufacturers have borne the brunt of the chip shortage.<\/p>\n In turn, reduced supply could slow automotive container demand which might impact the likes of Brambles<\/strong> ((BXB)).<\/p>\n Adversity offers unique opportunities for Australian companies<\/u><\/p>\n Apart from the medium-term disruptions, the shortage of semiconductors could provide a unique opportunity for some companies listed on the ASX.<\/p>\n 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".<\/p>\n According to the report, Australia’s semiconductor sector has become more of a consumer of products than a value-adding participant.<\/p>\n Despite lagging in semiconductor value creation, there are some listed companies that could offer investors exposure to growth in the semiconductor industry.<\/p>\n Brainchip<\/strong> ((BRN)) has long been dedicated to developing its Akida Neuromorphic Processor, which has various applications including infrastructure and the health sector.<\/p>\n Weebit Nano<\/strong> ((WBT)) is another player with its flagship ReRam chip designed to support a wide range of wearbles and devices.<\/p>\n Most recently, Archer Materials<\/strong> ((AXE)) has also made headlines after securing a patent in the US for its CQ quantum computing chip.<\/p>\n Australia’s only semiconductor ETF, ETFS Semiconductor ((SEMI)) also presents a lower risk option for investors looking to participate in the sector.<\/p>\n A new hope<\/u><\/p>\n Although there are many hurdles to participating in the semiconductor value chain, the sector offers tremendous growth opportunities.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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. <\/p>\n \n Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n