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For the want of a chip, the recovery was lost

‘Supply-side constraints are biting, inserting a wedge between soaring new orders and lacklustre production’


Pete Carvill

There has been some interesting production and industry news this week, much of it related to coronavirus.

On Wednesday, Samsung announced that its quarterly profits were forecast to jump 53% in Q2 2021. According to the BBC, the manufacturer was predicting an operating profit of $11bn in the period. The reason, it seems, has been a stronger demand for memory chips offsetting weaker sales of electronic devices.

As the BBC put it: “If the figures are confirmed later this month, it would be Samsung’s biggest second quarter profit since 2018.”

There was similar good news for German car giant BMW. Its US arm announced Q2 2021 sales of 96,561 vehicles, up 89.5% from Q2 2020 and 15% from 2019.

And there was more. “The company also reported Q2 2021 sales of 9,340 Mini vehicles in the US, a 76.6% increase compared to the time last period year,” according to Business Wire. “Year-to-date, Mini sales have increased 48.5% as compared to 2020.”

All this followed group news in April from BMW that the entire company had seen a 33.5% increase in vehicle sales in Q1 2021, compared to Q1 2020.

There is always a ‘but’

This would all sound positive if German industrial production had not missed its expected 0.5% rise in May, instead dropping 0.3%. While the country had seen its economic output growth by 17.3% compared to the same point a year before, its missing of its estimated growth shocked many.

Commenting on the German industrial figures was Claus Vistesen, chief eurozone economist for Pantheon Macro. He said: “It is now clear that supply-side constraints are biting, inserting a wedge between soaring new orders and lacklustre production. Indeed, it is now clear that German manufacturing stalled in the first half of the year.”

Or, put another way by Andrew Kennington, chief European economist at Capital Economics: “The small decline in German industrial production in May, which left it well below its pre-pandemic level, was due to another fall in vehicle production. This is likely to be resolved only gradually but, otherwise, the German economy is recovering strongly.”

Cheap as chips?

Kennington’s words belie the fact that car production worldwide fell as the coronavirus took hold. Instead of buying new vehicles, everyone stayed home and Zoomed into work. The manufacturers of the chips that would go into a new car, with decreased demand from that industry, sold those same chips to webcam makers.

The results have been brutal. As Time explained a few weeks ago, “When the initial lockdowns caused car sales to collapse, automakers cut their orders for parts, including semiconductors. (A typical new car can contain more than a thousand chips.) Chip manufacturers saw the slack and shifted their output to serve the surging demand for consumer electronics, like webcams and laptops.”

The magazine continued: “But when car sales snapped back last fall, a dramatic misstep became apparent: the automakers couldn’t get enough chips. They still can’t. Missing chips are now expected to lower global output by 3.9m vehicles in 2021, or 4.6%. Ford alone expects to produce 1.1 million fewer vehicles, leading to a $2.5bn earnings hit. (Even before it gets to its silicon-heavy electric F-150.)”

Car manufactuers have not been the only ones affected. As Fortune reported in May, “Apple, for example, has staggered the release of new iPhones to adjust for reduced supply.”

Eventually, as CNBC reported in May, this shortage is going to impact everybody.

Supply and demand showdown

It appears that we have two separate movements coming together in a confluence—a shake-out of the economic effects of the coronavirus pandemic and what happens when the development of technology moves beyond its capacity for production.

The most-prescient problem of the two is the former.

Tech is not the only industry affected. In the UK, house prices surged over 10% between March 2020 and March 2021 after the government cut the Stamp Duty tax in response to the pandemic. More and more people would like to work from home, even if their stress increases. Some believe that the economic pain of cities, having lost so many workers on a day-to-day basis, may continue far into the future. Everything that has happened in the eighteen months is going to affect everything, directly and indirectly, for  some time.

While it was inevitable that a pandemic would come, there was no way to predict when or how it would arrive, or for how long. It seems a distant memory today, but the world was on tenterhooks until the first vaccine was developed.

Now that the pandemic is here, there is the argument that a new pandemic, or a resurgence of this one, should move from the ‘unpredictable’ column it has been in to its ‘predictable’ counterpart. The world has changed in some definite and infinite way.

Funds and investors like to think that they can predict things. They build models and become experts in the subject, and sell that knowledge and those skills for large amounts of money. They can predict shortages and elections, even the weather. But it is easier to be right when the world is largely predictable. Moving forwards, they will need to anticipate the unpredictable, too.