Omicron will extend chip shortage to 2022 although supply chain management has improved: Moody’s

Mumbai: With the Omicron variant of the Covid-19 virus surging in many countries, the ongoing global chip shortage is expected to continue but not worsen in 2022 according to a report by credit rating firm Moody’s. While some production disruption is expected the situation is expected to remain under control due to greater vaccination status across chip-producing markets as well as better supply chain management by companies.

The chip shortage developed early in the pandemic as factory closures curtailed supply while the shift toward remote work increased demand, leading to an imbalance that grew worse over time. The shortage worsened during the Delta surge in the middle of 2021, which hit Malaysia, Vietnam, Taiwan, Korea and Japan, key countries in the semiconductor supply chain. At that time, less than half of the population in those countries had received one dose of a Covid-19 vaccine, and only one-quarter was fully vaccinated.

“Now, more than half of the population is vaccinated in these countries, and production is unlikely to be stymied the same way that it was during the mid-2021 Delta wave. Given what we know about the efficacy of the currently available vaccines in combating the Omicron variant, the Omicron surge should have a milder impact on the semiconductor chip supply chain,” said the report.

As with countries and vaccines, companies were initially caught off guard by the effects Covid-19 had on the chip supply chain due to their production model. Many companies that adopted just-in-time manufacturing were ill-equipped to deal with shortages in raw materials and key inputs such as chips and other electronic components that cut production.

Now, companies are learning to mitigate supply-chain disruptions by building inventory and exploring alternative sourcing. “Companies are learning to deal with these increasingly common shortages by building buffer inventory and exploring alternative sourcing,” said the report.

Over the past year, capital expenditure from chip manufacturers has grown 15%, and prices have also soared, with annual price growth in double digits for many chip types, helping to moderate demand. “This has been an incredible boon for chipmakers, with sales skyrocketing more than 25% in 2021. Although we expect sales growth to moderate to 10% this year, the secular movement toward an increasingly digital world augers well for the industry, which is at the heart of all modern electronic devices.”

The major chip manufacturers in Taiwan, Korea and China have all announced plans to expand operations domestically as well. India has also announced a new scheme to draw key semiconductor manufacturers to build fabs in the country, particularly those from Taiwan, with which it is discussing a free trade agreement. However, the supply constraints caused by Covid-19 clusters in various parts of the world will also aggravate chip shortages for certain chip applications (such as DRAM memory in the case of the current Xi’an lockdown). The major new foundries being built will only come on line after 2023, so lead times will be extended as supply remains tight, said Moody’s.

“Most new foundries (save for the one in Japan) are built to manufacture new-generation chips of 7 nanometers or less, leading to constrained supply for older-generation chips that are also typically consumed in larger quantities. The chip types that are likely to grow the most in the near term are those used in logic and sensor applications, with other areas such as electric vehicles, the Internet of Things, and 5G technology further driving demand…We expect these dislocations to be temporary and for long-term trends to dominate the chip cycle,” said the report.

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