March 22, 2021

The Semiconductor Shortage: How It Affects the Auto Industry

Show Notes

Let’s flashback to the 1970’s, a really interesting use-case for economists to explain what the central bank deals with today, the fear of inflation!

If you know anyone who was alive during that time, they probably remember the long lines in gas stations! This is because Nixon, in 1971, made oil price increases illegal (Effectively, a price ceiling) and also cut the link of Gold to the dollar, in an attempt to control inflation. The spending on the Vietnam War and Johnson's “Great Society”, a government spending initiative to reduce poverty levels, was thought to be the root of even-higher inflation.

From the 1970’s to the 1980’s, more than 50% of Americans thought that inflation or general price increases was the single biggest problem facing the economy. Contrast to today, when you mention inflation, some people have been looking for it for the past decade or so! That’s because inflation has remained low. Despite the printing of money in the 2008 financial crisis, inflation has largely stayed around 2%. The doomsday warnings of economists who have long-studied Monetarism (ie. the link of excessive money printing and inflation), have been ignored.

Every economic policy for a while now, are rooted on the premise that inflation will be low. It is the reason our central bank has been buying up billions of dollars worth of bonds and are cutting interest rates to near-zero. Records being broken in 2020 for how much the government is spending on both monetary and fiscal policy.

How does 2021 expect to unfold? How can the Fed defend against the blow-up of prices?

  1. The amount of cash in the economy grew about $3 trillion in 6 months. We can expect inflationary pressures to hit at least some parts of the economy.
  2. Fiscal Policy will have to be ready to deal with the recession that comes with the sudden rise of interest rates. Another stimulus package, if needed, when GDP growth slows again, basically a round 2 of 2020. This is probably not the best idea given our current state of M2 or excessive money supply.
  3. Monetary Policy’s main tool against inflation is hiking the interest rates! Similar to what Volcker did in the 70’s. Since the recent policies of the federal reserve has not worked to push inflation even to the 2% target, economists are skeptical on what the federal reserve can actually do.
  4. We hope you’ve learned enough about inflation and are considering taking it easy when increasing your own consumer spending.


News [00:00:00] Semiconductors are the brains of the power technology, and right now there is a shortage of those brains. And Josh, every morning we hear about more industries and more companies that are being impacted. 

News [00:00:10] Yeah, Becky, that's right. This is the most severe shortage of semiconductors in years. That's how analysts are describing this chip crunch to me. So companies are feeling the pinch. GM announcing it's extending a temporary shutdown at plants due to the chip shortage and telling analysts on the morning call that the shortage could cost up to two billion this year. Sony says it can't produce enough new game consoles, again, citing that same issue. 

Shikher Bhandary [00:00:38] We live in a digital economy that is largely powered by semiconductor chips. They are the brains of nearly every electronic device we buy and use from phones, laptops, Wi-Fi, medical equipment, military applications, and even our humble home fridges and toasters. So what happens when the chips are down? Well, the current shortage of chips worldwide is creating havoc in the manufacturing sector and the availability of products. So much so. The White House recently rushed to pass a bill to address this global concern. Tune in to part one of our Sammie's discussion on how the semiconductor shortage got so bad and doesn't seem like this could be solved anytime soon, which also means you might have to wait a bit longer to get a hold of the Xbox ones and the fives. 

Jed Tabernero [00:01:46] Welcome to THC, where we unpack the ever changing technology economy 

Adrian Grobelny [00:01:52] hangout with Jed, Shikher and Adrian as we tackle the industries of tomorrow. 

Shikher Bhandary [00:01:58] This is things have changed. 

Jed Tabernero [00:02:18] So we rewind to 2020, covid-19 pillages the world, OK, a couple of a couple of things happened. A couple of things happened, right? We started talking about how our tastes changed, right, we started buying more food from home, we started spending a lot more time at home because of the coveted Lockdown's Right. And people shifted their spending, their consumer spending towards things that we can't do with other people, which are things at home. You know, so we didn't go to concerts anymore, we didn't go to the movies, we stayed at home and ate Netflix and chill, Adrian, probably a lot. And, you know, we had this new wave. Of buying technology, right, stuff that can make your home comfortable to live in. Also, in light of like working from home, right? We work from home, you get a new monitor and you're like, oh, it's another 80, 90 bucks to get a third monitor and to make it look like a stupid, ridiculous setup that you don't need. And all these standing desks that started selling on Amazon, they have like three new versions of a standing desk, by the way. And we started buying things that, you know, would keep us comfortable at home. So one important input that went into all this technology that we are buying for the home, something that's super invisible to the consumers, I write something that we don't really see. Is semiconductors right, if you've been paying attention to the news lately, actually, you know, you may have heard of the shortage in the semiconductor space, right. And if you're thinking about what actually has semiconductors, right. Smartphones, you've got it in your computers, your monitors, medical equipment, cars have increased the amount of semiconductors. Now, how many semiconductors are there in court, Your Honor? 

Shikher Bhandary [00:04:07] I have no idea. It's probably like bajillions. 

Jed Tabernero [00:04:10] I mean, jillions just getting used to. That's what they wrote on Bloomberg gazillions, 

Shikher Bhandary [00:04:14] probably because I just imagine the stuff you can do in a car right now. You have a screen in your car, you can use your car play, you can do assists, reverse camera steering. Every action in a car right now involves some level of electronics, which is basically run by the chips. 

Adrian Grobelny [00:04:33] They used to be steering these to be hydraulic. Now they're all like electronics. So you have the steering lane assist. The engine components are way more electronic now with sensors trying to read, regulate everything that's just there. And just five, 10 years, the amount of electronics have gone into vehicles as probably 

Shikher Bhandary [00:04:52] five, 10 sensors, NATO CPMs, type O Ya'el pressure monitoring system. That was my project and back in school. 

Adrian Grobelny [00:04:59] So, yeah, you know, you don't just get those in the German cars. A trickle down to the Toyotas. 

Jed Tabernero [00:05:05] Yeah. I mean, and some cars have full self driving capabilities where you don't have to do anything. It's just crazy how much semiconductors are in every piece of technology that we use today. 

Shikher Bhandary [00:05:16] You mentioned self-driving, right? You have the leaders, you have cameras, anything with the cameras, electronic, anything. Electronic has chips in it. So what in your life is electronic right now? Your lights, your Wi-Fi, your your 5G, your smart speakers, your toasters, your fridges have screen these days. So like your whole life revolves around an on and off switch. 

Jed Tabernero [00:05:42] We're not we're not using less chips like GameStop. 

Shikher Bhandary [00:05:45] Only up. 

Jed Tabernero [00:05:46] Yeah, it's a GameStop, right. They produce more than a trillion dollars a year. It literally runs the frickin world. 

Adrian Grobelny [00:05:53] All of this demand goes beyond just the user end user like us, you know, to create these devices and these products, factories and distribution centers are all going automation. They're all going digital. They're having robots run these factory lines to develop these new products that we're all using more and more. 

Shikher Bhandary [00:06:13] It's so yeah, it's basically the products that we use are electronic. Those electronic products are produced in a factory that is electronic. Yeah, that's a so we had a scenario where, you know, for the longest demand and supply were matched. Like the companies manufacturing this, these components knew what is expected that the next day or so they matched how much they produced. Lo and behold, there is a crazy once in a century event like the pandemic, right, covid-19 hits. And suddenly. On many fronts, the demand just goes crazy, right, everyone started working from home. What happens when you work from home? You're using electronics. Obviously you're buying new monitors. You buy new laptops, you're buying new new flat screen TVs. There was a run on that. So Chipps kind of was like, you know, people were freaking out about toilet paper chips, actually saw that happen. The freak out actually happened there. You know, consumers just stocked up on all of these products. And that was actually a lot of impact that that caused. So let's let's focus a bit on the industry. There's a lot of talk about the chip shots. Right. So what was the demand that led to the auto industry, for example, being impacted this this heavily? 

Adrian Grobelny [00:07:43] So in the midst of the whole pandemic and how everything shut down, you know, business had to keep going on, how are we going to keep the economy going? How are we going to keep the door open while doors were closed, shops are closed down? Well, you know, we started to use them. We started to work remotely on laptops, on desktops and all of this. Traffic online created a huge demand and caused a cloud spending to hit new highs. I mean, nothing is run on just your laptop. Your laptop is running on the cloud. All of us use Google Drive. All of us are using the Internet. Everything is outsourced into another server. All websites are using servers. And so. The amount of demand and traffic that has gone on the cloud and the Internet since the pandemic started has just just gone 

Shikher Bhandary [00:08:40] parabolic as increases for the parabolic. There it is. Yeah. And I mean, you log on to your phone and you are checking your pictures, your pictures are on iCloud or Google Drive. Then you go on Instagram to update your social life, and that's on the cloud. Then you put your phone down for a second and you turn on the TV that's using chips, your TV, 

Adrian Grobelny [00:09:05] our cars are on the clock now. They're all talking to each other. 

Shikher Bhandary [00:09:07] And then you stream Netflix and that's on the cloud. So what is the cloud? The cloud is just a server somewhere in Utah and Nevada, 

Jed Tabernero [00:09:15] which is where we wait. So it's not flying cloud with data in it. 

Shikher Bhandary [00:09:19] It's no, it's not. 

Adrian Grobelny [00:09:21] I thought the cloud came to visit San Diego. It's been raining. It's a bad 

Jed Tabernero [00:09:25] recording. Yeah, that was. 

Shikher Bhandary [00:09:26] Yeah, that's true. But it's literally like a big. Big piece of land where you have buildings with just. Hard drives and hard drives of silver silvas. Right, so it's literally a building somewhere out in the middle of nowhere that is that's fueling most of what we do. Like, for example, AWS went down AWS one dash, not dash five went down. And because of that, thousand people in Brooklyn didn't have access to Netflix. So it's so crazy that you have these servers all across the country and Europe and stuff which are powering like small districts across the country. And all of this, again, needs chips. Covid-19 happens and everyone's online. So now everyone is like all the cloud providers are now spending heavily on revamping their equipment. And that's I mean, that's, again, chips that they're buying and reducing the supply for the rest of the market. 

Jed Tabernero [00:10:35] They're trying to meet demand. Yeah, right. Everybody's trying to meet demand. And this push is just causing us to try to to match up and try to speed up production. You know, some industries could try to match up to that demand and maybe some are successful, maybe some weren't. But one industry that wasn't successful was the auto industry. Right. They weren't successful in meeting demand, you know, similar to industries who don't have a lot of control on their supply chain. The auto industry is one such case where they practice something called just in time production, 

Shikher Bhandary [00:11:10] where everything is lean, lean production is 

Jed Tabernero [00:11:13] lean. I mean, with technology. Right. Arguably, you can predict to some extent what will happen in the next few months for what demand will look like that. And then the deals are made in order to be able to service those demands needed. 

Shikher Bhandary [00:11:27] So basically, you don't have extra stuff. You just don't have the extra stuff just sitting in the warehouse. How much you build is how much you sell. 

Jed Tabernero [00:11:35] I mean, that would be the most ideal world, right? You don't build anything that's that's going to waste because you never know. A car goes out of style in a frickin year. Right. So there's twenty 19 Toyotas and 20, 20 Toyotas. And, you know, all of that would have changed supply chains if they stopped production of 20 19 Toyota. So it's just interesting to see because that kind of manufacturing tactic. Right. Lends itself to a risk of demand, pushes right. Demand shocks, also supply shocks. But any types of shocks within the supply chain will significantly affect production with just in time manufacturing because it limits their ability to plan. Right. And so all these deals you've made with these chip makers, with these these fabs to produce these products. Right. That's at risk, because if everybody needs this product and you're vying for a small piece of it, like what is your command? You know, maybe this wasn't such an important topic in in some automakers boardrooms, which maybe it should have been. Right. And now we're kind of seeing that importance get highlighted even to the highest levels of the White House. Right. 

Adrian Grobelny [00:12:44] The auto industry in particular got affected. Like you said, they're operating very lean. They're having to make sure that they create just enough to meet the demand. So we have the pandemic shocks the world. No one's buying cars. You have car lots that are massive. You have them paying just to get rid of cars. 

Shikher Bhandary [00:13:04] The luxury storage sitting on my Honda CRV to any 19 sitting in the lot. In April. The carlot knew it's going to be everything's going to be shut. They sold it to him for sixteen thousand dollars less. So instead of no real story, instead of 30, he paid 14 for a new twenty nine point CRV. That was how crazy it was because they 

Adrian Grobelny [00:13:32] knew it would cost them more to have to deal with it storage. We had the same issue with oil storage supply having to get rid of it. So car carmakers are trying to get rid of these cars. They're putting fat rebates on them. And so because of this, they cut down all of their expectations of needing semiconductors, which means they're orders ahead were cut. And they, you know, they had no certainty in what the pandemic was going to happen to their demand for cars. When was it going to rebound? All they were trying to do was deal with it at that moment in time. So with that boom cutting back now. We're going through the pandemic. Things are getting back to normal, people are starting to spend more and get back to purchasing new cars. You know, they've they've had a savings account. They've been saving up. So they're thinking, you know, I can justify getting a new car now. But these car manufacturers, with their orders initially, they can't keep up with the demand. Now, this bounce back that we're seeing and car purchases. And so that's causing a big issue. You're having fires at these factories in Japan that have caused issues with the development of these semiconductors and they just can't keep up. GM is actually shutting down their factories now because they just don't have any chips to create cars with. It's it's it's gone. It's gone out of pocket. 

Shikher Bhandary [00:14:50] And the thing about the auto industry is they don't make a whole lot of revenue for the chip makers. It is sizable. It's four percent, which probably amounts to a whole lot. But they are not the high priority customers for the chip chip manufacturers who are the high priority customers, Apple, Google, Amazon, IBM. 

Jed Tabernero [00:15:14] And Microsoft or anybody with data centers, anybody with phones running hardware that's just going out there like crazy. 

Shikher Bhandary [00:15:22] Yep. Anyone providing the servers, all of that. When the auto industry says productions down 40 percent, we don't need 40 percent of the stuff that you have manufactured for us. So you can take that off the table. What did the electronic manufacturers do? What is the Google Apple look like, they're like, OK, we will take that and we are going to take all your capacity. So now. That capacity is completely gone, it's been filled by someone other than the auto industry, and no one's going to say no to these guys who are the biggest companies right now. It's not Ford. So GM, it is your usual suspects, Frank. Yeah, there's all sorts of geopolitical issues. You know, the trade wars, which will cover in our future episode where, you know, there was a lot of stockpiling of chips that was an unintended consequence of the trade war, which further worsen the situation for the auto industry. But let's just focus on what happened when suddenly demand sprung back. So people are stuck at home and they're like, OK, I need to get out. I don't want to use public transportation. I need a car. They go out. There are no cars. I mean, there are old cars, but suddenly demand for cars just brings back. Right. And now the auto industry are in such a hard spot because they have just all the chip companies. I don't need your chips. 40 percent cut and suddenly they need. Everything they need, any possible chip that they can get a hold of. 

Adrian Grobelny [00:17:00] Yeah, I mean, can you blame them? They they were in a tough position. They were at risk managing as much as they could cutting down their spending because they just weren't getting any revenue. But now they're not going to create a million cars because of the shortage. That means a million cars, less new cars on the lots, all of that. 

Jed Tabernero [00:17:18] Well, that makes sense as as a next step. It's still also like supply chain risk. There have always been out there in the very beginning, like when we talked about what's the effect that Govey 19 will have? Well, if plants start closing in China and those plants in China were the ones producing whatever raw materials we needed into our products, like we knew there was going to be some sort of supply run. Right. So I guess like one of the things that they could have paid attention to was securing their supply chains. Some auto auto manufacturers are are in better places than others in terms of securing their supply chains and making sure that if ever there was a push back, which was expected once this pandemic went away, they could service the amount of demand that was going to come back. 

Shikher Bhandary [00:18:00] Yeah, you make a good point, because we see a lot. There is just stark headlines for the US auto sector due to the chip shortage of Ford GM cutting so many jobs, two point one billion to over two billion dollars lost just because of not having chips to push out the are their cars. Right. And this is they have extended this all the way to like March, April, and they have been shot since. The middle of last year, so but the companies that actually were able to figure it out have like a robust supply chains inherently like like Toyota, right. They have a system. It's Toyota is a Japanese company that runs on something called the keiretsu. And what that is, is I'm going slightly in a tangent, but it's kind of interesting to notice that the Kyra. So it's basically Toyota sits at the top of the chain and many companies provide parts to Toyota. Right. You have the company that gives you the windshield. The company that gives you the chips. The company that gives you the flat screens in the Toyotas, the see, it's leather. There are so many real goods that go into making a car a finished product. Toyota, the kibitzer works such that they or Toyota, the big fish owns a stake in all the small little fish. So they have their own supply chain as part of their existence, the small companies just provide to Toyota, so they kind of were able to figure out a way to bypass this whole chip shortage issue. 

Jed Tabernero [00:19:41] When I was living with Shika in Arizona was, you know, you're living with the boys and everybody's working from home. You kind of want a game console, you know, you kind of want to play some card, you know what I mean? We wanted to do that. So we were like, oh, we actually want yeah, we wanted to 

Shikher Bhandary [00:19:58] because we used to just sit and watch. We got this new TV and we were just watching these like PlayStation five, like Sony was creating a lot of hype around it. Right. These cool videos of what the latest engine is on these PlayStation's. And we were like, oh my God, that is unreal. We need it. 

Jed Tabernero [00:20:16] I mean, we didn't we didn't make the decision not to buy it because of supply issues. We made a decision so that we wouldn't be irresponsible and like, you know, get out of our routines. But then as the months sprung by, it was harder and harder to get access to that thing. Even second hand was selling for more than original price. I was like, Bro, this is stupid. 

Shikher Bhandary [00:20:37] Yeah, it was like five hundred bucks. And we were like, OK, this this is OK. I guess if we split and just just to ration our other resources, we can manage buying this. And then the next month is seven hundred and today it's like a thousand bucks. It's reselling four thousand bucks. There's actually a Twitter account which got like one, two hundred thousand followers. And all it does is track fives and Xbox scores in the country, oh, this location is getting 10000 Xbox and there's a drum and in a day it's sold out like it's it's crazy. Everything basically everything from home went crazy, went bonkers. Your work from home, you study from home, your game from home. So it's like even even imagine the amount of lost sales for Sony and Microsoft. They have been hyping the next console for, what, seven years, eight years when when the PS4 release like eight years or ten years back. This is supposed to be the next console to go for the next 10 years, and the launch was so soft because there's no supply, because there's a chip shortage. 

Adrian Grobelny [00:21:51] So next time user pays five search phones, laptops, be thankful for those. 

Shikher Bhandary [00:21:57] Yeah. And so one question that people might think were. People, other people might be thinking is. Wait, if there's suddenly a demand spike, why can't we just meet the supply? Like, why can't we just make more? It's not that easy, it's among the most complex technologies ever, and we'll talk more about it in our next episode because we like leaving people wanting more. So. Our next episode of Cliffhanger, just like, you know, those old Dragonball, the episodes where you're like, what, what, what? I need to know what's next. So, yeah, I mean, it's not just one thing. It's like technology, the costs, geopolitical issues. It's a huge conversation. It's a huge topic which has gone all the way to the White House to to kind of try and resolve this issue. 

Jed Tabernero [00:22:53] On the next episode, we'll talk more about the supply side and how things are shaping up and why it's so hard to meet that demand. But, you know, maybe one takeaway is calm the fuck down, guys. Wait, wait a little bit for the next. You know, don't buy that thousand dollar. You. Nobody's calling anybody out. Nobody calls anybody out. This is more like the same for no Tesla buyers. All right. 

Shikher Bhandary [00:23:15] One day I decided I don't have a good enough moniteau. That's what he says. He has like a 20 inch monitor or whatever. And then he goes and buys like a thousand dollar Moneta and then he sells it in like a week because it was good. It was still bright. It was hurting his eyes. And it was like, what? 

Adrian Grobelny [00:23:34] Ever hear in a settings? 

Shikher Bhandary [00:23:41] Hey, thanks so much for listening to our show this week. You could subscribe to us and if you're feeling generous, well, you could even leave us a review. Trust me, it goes a long, long way. You could also follow THC activity, underscore part on Twitter and LinkedIn. This is things have changed.