Schwab Sector Views: Semiconductors—Boom or Bust?

The semiconductor shortage and its impact on everything from autos to smartphone production has been much in the news. The shortage has been a boon for semiconductor stock prices. But it likely will resolve itself in the coming months—or years, depending on whom you talk to—raising the specter of a bust. How likely is it? Could it be different this time? And how should investors respond?

Chip shortage: How did we get here?

The saga began with the emergence of the COVID-19 virus in early 2020. The chip industry expected a major cyclical downturn in demand, as has happened many times during past recessions. Initially, that seemed to be the case, with automakers canceling orders as they prepared for what they thought could be a 20% to 40% decline in car sales.

However, amid stay-at-home mandates, consumers quickly shifted their spending from dining out and traveling to home-entertainment electronics and home-office equipment. Businesses scrambled to snap up PCs, monitors, and internet routers to help workers telecommute. Cable companies had to expand their infrastructure to meet the demand, and cloud data centers ramped up capacity. As all these things require semiconductors, chip demand rose 10.8% in 2020 and is estimated to have grown another 17.3% in 2021.1

Manufacturing orders for computers and electronics have risen 15% from pre-pandemic levels

Semiconductor supply did not keep up with demand. First, there were the COVID-related closures of chip fabrication facilities. Then a fire in Japan, freezing weather in the southern United States, and drought in Taiwan—where the vast of majority of chips are made—temporarily halted manufacturing. With many industries operating with just-in-time inventory (keeping enough on hand for a few days), their slim stockpiles of chips were quickly drawn down. This impacted all sorts of products from agriculture and heavy machinery to gaming consoles and smartphones. The auto industry’s problems are well-known, with automakers forced to halt production of many models and even cut back on electronic features like digital speedometers and infotainment screens.