As we enter the second half of 2021 – touted as the year of the “Vaccine and Reopening”, we are starting to see signs of the challenges that lie ahead on this long and arduous journey to normalization such as repeated lockdowns, new COVID-19 variants and unequal distribution of vaccine.
In our previous newsletter, we cautioned against being too negative on growth stocks versus value or reopening plays, and for long-term investors, it is better to stay invested in stocks primed for long-term secular growth. Post a period of consolidation in 1Q 2021, we are beginning to see global growth starting to outperform since late May 2021.
With markets now at fairly extended new highs, it is natural to have a niggling sense of apprehension as one wonders when the next market correction may come. However, for longer-term investors, we refer to the famous words by legendary investor Peter Lynch – “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves”.
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Just as disruption and innovation are the lifeblood of our Fund, polysilicon is the lifeblood that keeps such innovation alive. In recent months, there has been ample news ﬂow regarding the global semiconductor chips supply shortage. Our team member Jason Chang, who covers the IT equipment and hardware space, shares the background and outlook on the global chips shortage.
The global chips shortage started in 2020 and intensiﬁed throughout the ﬁrst half of 2021, hitting the automobile industry particularly hard in 2Q21. The issues have escalated, interrupting the production of a wide range of goods, and have triggered concerns about the disruption of the current global manufacturing boom. The shortage is attributable to a myriad of supply and demand factors – unexpected rapid demand increase colliding with underestimated supply schedules and disruptions from natural disasters. We believe that such tight production capacity for chips and the boom in the semiconductor industry will continue into 2022, driven by long-term structural supply-demand factors.
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On the Supply Side
periods of under-investment and the conﬂuence of several natural disasters exacerbated the situation
- Semiconductor companies have been cautious about expanding capacity in the past year due to uncertainty caused by COVID-19. In particular, the most severe chip shortage took place in the 8-inch foundries segment, reﬂecting an extended period of under-investment in legacy nodes at the 8-inch foundry fabs.
- The COVID-19 pandemic led to declines in capacity utilization rates at companies in the global semiconductor industry value chain.
- In early 2021, we saw several global tier-one semiconductor companies suspend production due to natural disasters. For example, a severe winter storm in Texas forced chip companies (e.g. NXP Semiconductors, Inﬁneon Technologies, Samsung, etc.) to shut down operations. Renesas had its production in Japan disrupted by an earthquake in February and a ﬁre incident in March. This unfortunate timing exacerbated the squeeze on a heretofore tight supply chain.
On the Demand Side
Demand has been structurally strong across all applications due to a number of reasons
- COVID-19 has changed the average person’s lifestyle, which drives strong demand for IT products(notebook, Chromebook, tablets, etc.) with the increasing need to work from home, entertainment demands from staying at home as well as learning from home. Source: Taiwan Government
- 5G smartphones have a more complicated chip design and consume 20% more wafer to make chips than 4G. The rising penetration rate of 5G smartphones has structurally driven the overall demand for chips. China’s 5G penetration has reached nearly 80% in recent months. Source: China MIIT
- The auto supply chain has also become a large consumer of semiconductor chips. Cyclically, demand was driven by auto shipment’s year-on-year recovery. Whilst structurally, we continue to see rising penetration rates of Electric Vehicles (EV) globally. The dollar value of chips required in an EV car is 5x – 10x that of a traditional car. Source: Citi Research
In combination, rising structural demand amid the ongoing 5G roll-out, and wider applications across Artiﬁcial Intelligence, high-performance computing, and autonomous/electric vehicles all boosted chip demand, especially since each product now requires more chips than before. Chipmakers globally are scaling up investment, but it is unlikely to resolve near-term supply issues, as meaningful addition of supplies will only come online in 2022-2023.
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