Computer chips, or semiconductors, power everything from cars to consumer electronics, such as PCs, gaming consoles and smartphones. The recent shortage in this valuable resource has significant implications for consumer prices, company profits, employment, inflation, and even national security.

While we expect the chip bottleneck to ease somewhat in the second half of the year, particularly for car companies, stronger demand for semiconductors is set to stay. Over the longer term, we expect a semiconductor supercycle with continued demand from traditional sources, such as consumer electronics, supplemented by increasing demand from newer sources, such as chips for artificial intelligence (AI) applications.

Although we see significant opportunities in the semiconductor sector, we are watching a variety of risks as we assess which companies are likely to be winners and losers in the anticipated supercycle.

What is driving the global chip shortage?

Two key factors are driving the shortage: a COVID-19-driven disruption to supply and demand dynamics and ongoing geopolitical tensions between the U.S. and China.

Demand for consumer electronics surged during the pandemic as millions of people were forced to work and study from home. Global PC shipments grew by 10.7% in 4Q 2020 and 4.8% for the full year, with 275 million units shipped in 2020, the highest growth for the past 10 years. At the same time, demand for automotive chips declined as orders for new cars fell in 1H 2020. Semiconductor foundries shifted capacity to consumer products, which tend to be more sophisticated and offer better margins. This has led to a shortage of capacity for industrial chip production. When auto sector demand rebounded in the second half of 2020, car companies couldn’t get enough.

Most Chinese chip manufacturers rely on U.S. software and machinery to fabricate semiconductors. Following the imposition of U.S. government restrictions on technology exports to China in 2019, Chinese companies started stockpiling chip inventory, contributing to the shortage. Chinese imports of semiconductors rose 14.6% year-on-year in 2020 to $350 billion (U.S.), or 2.4% of GDP, while its technology and R&D investment grew from 1.2% of GDP in 2019 to 1.5% of GDP in 2020.

In addition, geopolitical tensions have affected the appetite of global tech companies to invest. That’s added to the shortage because only a handful of advanced foundries can support the surge in demand for semiconductors. Over 83% of global foundry revenue is generated by companies headquartered in Taiwan and South Korea, and the concentration is even worse for cutting-edge chips. The “just-in-time” model works best in a stable supply and demand environment. Now, Chinese and even global manufacturers may have to consider a “just-in-case” model given supply uncertainty, partly related to access to U.S. technology.