Geoffrey Smith

Investing.com — Want to scare people at the Hallowe’en party this year? Trying going dressed up as that scariest of all things right now – a global supply chain.

The first thing to know is that you will have to create this costume. It was made in Vietnam, but the factory has only recently reopened. Even if it could be picked up in Ho Chi Minh City it would still have to go in line with over 70 other ships currently waiting outside Long Beach port to receive $26 billion of cargo.

U.S. ports are clogged with goods, which is why it is sometimes called a supply-chain crisis. U.S. Imports hit an all-time high of $287billion in September. This is 8.8% more than the Trump-era peak. Both manufacturers and retailers knew for months that this holiday season was going to be difficult. They raced to order their products in advance.
These events took place at the same time as Covid-19-related workplace restrictions. It’s no wonder that the system is creaking.

The ongoing earnings season has seen supply chain news that is truly alarming. From Toyota (T:), to Kimberly-Clark, (NYSE:), and Whirlpool, (NYSE:), companies have inflated their projections about how long they expect their industry will be affected by shortages in labor.

The post-pandemic world has evolved from a small, but dramatic, quirk to something larger and more dangerous.

As the world’s central bankers and Finance Ministers huddled earlier this month at the International Monetary Fund’s annual meeting, the general realization that what was expected to be a spike in prices is starting to look like a plateau – at least in some countries and for some products.

Tiff Macklem (Bank of Canada Governor) summarized the following:
Apple (NASDAQ 🙂 was rumored to be planning to decrease shipments for its iPhone 13 series at the end of September due to inability of sourcing key components. This was a wake up call for all who thought that the chip shortage only affected lower-paying customers with lower tech products.

Last week, Snap (NYSE:) – the parent company of social media company Snapchat – warned that advertisers had cut their budgets, illustrating that even social media companies and other fancy software-based companies live, ultimately, on the same food chain as manufacturers and retailers.

The global shortage of chip chips is a major reason for the weak sales figures, even chipmakers. Intel (NASDAQ:) said last week it missed sales targets because the gadget makers who buy its chips had ordered fewer – because they were missing semiconductors from other companies needed to make their finished product, a concept Intel memorably summed up as “notebook ecosystem constraints.”

It is the core of the problem that semiconductors are being increasingly integrated into manufacturing processes and other services. Although there are no clear consensuses on the timeframe for the crisis, they have been moving toward longer-term solutions. The full-throttle stimulus policy has ensured that the demand for goods is stronger than expected. Lockdown restrictions have been lifted and consumers are allowed to buy services again.

This puts the emphasis back on the supply aspect of the equation. Building a chip factory is not an easy task. And manufacturers – especially those vulnerable to undercutting by China – agonize over laying out billions up front to build factories that may not be fully utilized.

However, geopolitics – in the form of increasingly muscular U.S. trade policy toward China – has given the industry a degree of comfort on that front. ASML, a Dutch company that makes the $150 million-plus lithography machines for printing small and powerful chips is resisting U.S. diplomatic pressure to withhold such machines from China.

You can see the results of this from Arizona to Texas, to Japan. Intel plans to construct two new manufacturing plants for $20 billion. Samsung (KSI:) may soon agree to build a Texas facility. Taiwan Semiconductor Manufacturing (NYSE:), the world’s largest contract chip manufacturer, is expected to sign up to build a big new plant in Japan.

These projects are not quick. Samsung expects that any new plant will be fully operational by 2024. Pat Gelsinger, Intel CEO, has stated that he believes there will be no shortages until 2023. This synchronized growth of capacity cannot be interpreted as a positive outcome. However, the chip industry is still highly cyclical despite its current secular growth forecast.

Sooner or later supply will exceed demand. It is likely that central banks across the west raise their interest rates in an effort to keep inflation under control. While the peak is not visible yet, it is sure to come soon.