The chip shortage is all but over, according to J.P. Morgan Research. In fact, there may even be oversupply in the short term, though looking further ahead, some shortages could linger as certain types of chips remain more in demand than others.
Semiconductors or chips are a crucial element in the manufacturing of consumer electronics such as smartphones, cameras and computers. In cars, they are needed for everything from entertainment systems to power steering. At the height of the chip shortage, global auto production slumped 26% during the first nine months of 2021. Find out why chip shortages heavily impact the auto industry and what lies ahead for 2023 as the outlook improves.
“2023 should mark a strong earnings year for the industry, with less volatile raw material costs and a more stable supply chain,” said Jose Asumendi, Head of European Automotive Research. “Raw material headwinds will slow, eventually providing a tailwind sometime in the second half of 2023. Overall, we predict a strong year for the autos sector, with global car production up 3% year-over-year.”
There is likely to be less earnings volatility in 2023, with original equipment manufacturers (OEMs) maintaining strong pricing power. Equally, more stability should boost the earnings momentum of suppliers and make this a stronger year across the board. “We anticipate tight control over inventories, which maintains pricing power for OEMs and reduces the likelihood of rising incentives,” added Asumendi. “Overall, we expect a more stable pricing environment.” In terms of demand, OEMs expect some normalization, which is not unusual moving away from a period of extraordinary demand and low supply.
Europe remains the weakest region for production, particularly compared with North America and China, where there has been stronger recovery post-2020. The region has been the hardest hit by supply constraints linked to semiconductor shortages and the Russia-Ukraine crisis. However, production is showing signs of improvement. “Counterintuitively, we now expect Europe to show the strongest growth rate globally in 2023—we anticipate 5% year-over-year,” said Asumendi. Strong growth rates in January and February confirm supply chain stability is returning following the constraints of the past three years.
We’re nearing the end of the supply crunch after more semiconductor capacity came online in 2022 … Looking ahead, we don’t predict any major constraints.
Chip supply began to improve in 2022 and looks set to continue through 2023. Capacity was initially freed up due to weakness in some end markets, particularly PCs, smartphones and consumer electronics, where sales began falling in March 2022. Foundries in Taiwan reallocated some of this capacity to the automobile and industrial end markets, which lost out to other sectors during the COVID-19 pandemic.
However, automakers are increasingly requiring chips with higher computing power—especially as the industry transitions to electric and autonomous vehicles—which are fundamentally different to those used in PCs and smartphones. “Capacity still needs to be qualified for use in the automotive industry. Can the right matching occur between available supply and correct qualification? This is the difficulty that remains, though we don’t predict any major constraints,” said Sandeep Deshpande, Head of European Technology Research at J.P. Morgan. “We’re nearing the end of the supply crunch now after more semiconductor capacity came online in the second half of 2022.”
In the simplest terms, the chip shortage was due to strong demand and no supply. This goes back to COVID-19 lockdowns in the second quarter of 2020, when demand for work-from-home technology increased exponentially and automakers found themselves competing for the semiconductor capacity in Asian foundries. These supply chain issues caused upheaval in the auto industry, holding up production and denting sales.
Adding to the problem, downstream operations in South and Southeast Asia were adversely impacted by the COVID-19 Delta variant, creating further bottlenecks in the supply chain. Malaysia in particular performs many “back-end” operations such as chip packaging and testing, which are more labor-intensive than wafer fabrication processes, so activity is more easily affected by public health measures.
At the beginning of the pandemic, car companies canceled orders, but as production ramped up again toward the end of 2020, there was no semiconductor supply available. This was compounded by increased demand particularly at the higher end of the autos market, as low interest rates aided affordability.
While the COVID-19 pandemic was the initial catalyst for the chip shortage, structural factors were also part of the picture. Fundamentally, the auto industry is changing, with a major shift toward automation and electric vehicles. These require yet more chips, causing further strain on an already stretched industry.
Inflation and the auto industry: When will car prices drop?
February 22, 2023
J.P. Morgan Research explores the factors driving up vehicle prices and when inflationary pressures will abate.
This communication is provided for information purposes only. Please read J.P. Morgan research reports related to its contents for more information, including important disclosures. JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively, J.P. Morgan) normally make a market and trade as principal in securities, other financial products and other asset classes that may be discussed in this communication.
This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy except with respect to any disclosures relative to J.P. Morgan and/or its affiliates and an analyst's involvement with any company (or security, other financial product or other asset class) that may be the subject of this communication. Any opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This communication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Research does not provide individually tailored investment advice. Any opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. You must make your own independent decisions regarding any securities, financial instruments or strategies mentioned or related to the information herein. Periodic updates may be provided on companies, issuers or industries based on specific developments or announcements, market conditions or any other publicly available information. However, J.P. Morgan may be restricted from updating information contained in this communication for regulatory or other reasons. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.
This communication may not be redistributed or retransmitted, in whole or in part, or in any form or manner, without the express written consent of J.P. Morgan. Any unauthorized use or disclosure is prohibited. Receipt and review of this information constitutes your agreement not to redistribute or retransmit the contents and information contained in this communication without first obtaining express permission from an authorized officer of J.P. Morgan. Copyright 2022 JPMorgan Chase & Co. All rights reserved.
MSCI: The MSCI sourced information is the exclusive property of MSCI. Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an ‘as is’ basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates.