A shortage of semiconductors is wreaking havoc across the global economy and is having an increasing influence on Australia. Semiconductors are used to manufacture various kinds of electronic devices, including diodes, transistors and integrated circuits. These components are integral to computers, vehicles, renewable energy, military hardware and virtually all electronic devices. Semiconductors are the lifeblood of many industries, ranking as the world’s third most traded product in 2018, after cars and refined petroleum.
Impact on Australian Industries
Motor vehicle dealers
The impact on Australian industries is widespread and rising, as a lack of semiconductors curtails manufacturing and increases costs for end consumers. Disruptions in the Motor Vehicle Dealers industry have been particularly strong. The average internal combustion car today uses between 50 to 200 individual semiconductor chips, while hybrid and electric cars can use up to 3,500 chips.
Many vehicle manufacturers cancelled semiconductor orders during the initial COVID-19 outbreak. At the time, manufacturers erroneously predicted that demand for vehicles would be weak amid an economic recession. However, global demand for vehicles bounced back in the final quarter of 2020. Vehicle manufacturers have been unable to return to their previous semiconductor supply agreements, as competing electronics manufacturers have now purchased that capacity.
Cars are not manufactured in Australia, leading dealers to rely on import agreements. Several global manufacturers, including Ford, Toyota, Nissan and General Motors, have been forced to idle or scale back production due to ongoing shortages. In Australia, this factor has led to wait times of up to six months for some vehicles.
Electronics
The semiconductor shortage has disrupted a range of electronics-focused industries. NBN Co Limited, which accounts for 42.8% of the Wired Telecommunications Network Operation industry, had to stop connecting new customers in February amid a dwindling supply of internet modems. Across the Consumer Goods Retailing industry, delivery times have steadily lengthened for computers, televisions, smartphones, cameras and even internet-connected fridges. In the Video Game, DVD and Recorded Music Retailing industry, shortages have hindered the rollout of the PlayStation 5 and Xbox Series X gaming consoles.
Shortage spurred by demand spike
The origin of the global semiconductor shortage has its roots in both supply and demand factors. Demand for semiconductors has surged throughout the COVID-19 pandemic, as workers have upgraded home offices to suit working from home arrangements. Unlike many retail industries, revenue across the Computer and Software Retailing industry grew by 6.6% in 2019-20, and is expected to rise by a further 4.8% in 2020-21. Major communication platforms, such as Zoom, Slack and Microsoft Teams, have also invested heavily in expanding server capacity to support millions of new users.
Consumers being restricted to their homes during lockdown periods has also spurred demand for home entertainment systems. Revenue across the Online Consumer Electronics Sales industry is expected to rise by 12.2% in 2020-21, after surging by 25.8% in 2019-20.
Staggering growth in cryptocurrencies has also spurred demand for semiconductors. As cryptocurrency prices rise, it becomes more lucrative to mine them using large computer servers, which rely on semiconductor components.
Shortage linked to supply problems
Overall, a combination of factors linked to the COVID-19 pandemic have caused a surge in demand for electronic goods. However, demand factors are not the only reason behind the global shortage. On the supply side, several factors have limited the supply of semiconductors. In Texas, severe storms led to the closure of semiconductor fabricators. In Japan, a fire at the Renesas Electronics production facility led to a halt in production in March. The Renesas facility supplies almost two-thirds of all chips used by the global automotive sector. In Taiwan, the worst drought in 60 years has severely affected manufacturing operations, as semiconductor manufacturing is highly water-intensive.
Manufacturers also have little ability to invest in new semiconductor fabrication facilities. Barriers to entry are high, with new facilities typically costing in excess of $13 billion and requiring at least three years to become operational. The high rate of technological disruption also makes such investment risky, as new fabrication facilities may not be able to match the capabilities and price points of existing incumbents. The industry is highly concentrated, with Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung accounting for over 70% of global semiconductor supply.
Australian semiconductor industry
Despite the significant barriers to entry, Australia is increasingly considering developing its own semiconductor manufacturing operations. Australia depends on countries that may be subject to geopolitical supply disruptions, such as Taiwan. In December 2020, a study commissioned by the Office of the NSW Chief Scientist & Engineer found that Australia has certain competitive advantages for semiconductor manufacturing. These include an impressive appetite for widespread and rapid technology adoption, historically favourable exchange rates and strong university rankings.
Outlook
The outlook for semiconductor supply remains highly uncertain, and may be significantly disrupted by developments in US-China trade tensions or adverse weather events. However, overall supply is expected to broadly normalise by 2022-23, as the impact of the COVID-19 pandemic fades and new production facilities begin to come online. Until then, supply shortages are expected to continue hindering major electronics and automotive manufacturers. Price rises caused by the semiconductor shortage have so far remained limited. However, prices may start to rise for low-margin consumer products in the near future, as the capacity crunch persists.
IBISWorld reports used to develop this release:
- Motor Vehicle Dealers in Australia
- Wired Telecommunications Network Operation in Australia
- Consumer Goods Retailing in Australia
- Video Game, DVD and Recorded Music Retailing in Australia
- Computer and Software Retailing in Australia
- Online Consumer Electronics Sales in Australia
For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Jason Aravanis
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647
Email: mediarelations@ibisworld.com
