Falling demand and semiconductor shortages hit struggling tech and autos firms

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The supply-related constraints which have troubled global
electronics producers since early last year were compounded as
demand conditions in key industries deteriorated in July. New
orders received by electronics producers fell at the fastest rate
since mid-2020 amid reports of a blanket drop-off in demand from
both large developed markets such as Europe and the US, to key
manufacturing hubs in Asia such as China and Taiwan. Falling sales
in key industries to electronics firms such as tech and autos add
further woe to an already-beleaguered sector.

Proprietary supply shortages and price pressure indicators from
S&P Global Market Intelligence’s PMI surveys provide additional
evidence of the still-significant shortages of semiconductors
globally, and the sustained steep upward inflationary forces on
prices for microchips which are squeezing profitability for
companies reliant on chips. Although these pressures have eased off
slightly, this is primarily attributable to slumping demand as
global economic conditions turn worse. Waning demand for
semiconductors bodes ill for tech stocks, while the Philadelphia
semiconductor index, which covers the 30 biggest US firms involved
in the manufacture, design and sale of the microchips, has
undergone a steep decline so far this year.

Slow normalisation in semiconductor stocks keeps price
pressures sky-high

Although we’ve seen evidence that the supply crunch for
electronic and electrical items has receded from its peaks last
year, our proprietary data suggest that shortages are still running
at significant levels (see chart). In July, shortages of
semiconductors were around 6 times their long-run average. Fresh
lockdowns in China and the subsequent disruption to ports in
Shanghai has however recently exacerbated problems, with the
measure creeping up.

As such, price pressures remain elevated, particularly when
compared to the broader trend in the other items covered by our
tracker (see this note
here for more detail) . While price pressures in “all items”
were around two times what would be considered “normal” levels,
semiconductor prices are running at approximately 15 times their
historical average.

Tech, autos and electronics struggle amid steep cost
pressures and falling global demand

Sectors with strong links to the semiconductor industry such as
Technology Equipment, Automobile & Auto Parts and general
Electronics have seen their input costs soar and production
capacities restricted. Aside from rates of increase seen since the
pandemic, input costs at Technology Equipment and Electronics firms
are rising quicker than at any other time seen in their respective
series histories.

However, firms’ ability to share the burden of higher costs with
clients has been challenged by weakening global demand conditions,
with July PMI survey data signalling that the first decline in
demand for global manufactured goods since the initial COVID-19
lockdowns in the first half of 2020.

Sectors with a greater reliance on semiconductors, such as
Technology Equipment, Automobiles & Auto Parts and Electronics,
saw new orders fall during July, highlighting the additional
difficulties these industries could face if the supply of
semiconductors fails to improve and prices remain excessively high.
Sales trends in each industry have undergone a significant slowdown
from recent peaks in the middle of last year as the global economy
rotated demand into goods, with high price levels and slowing
global growth set to accelerate this trend further.

Semiconductor and tech stocks suffer

Subsequently, the outlook for the semiconductor sector appears
bleak. The Philadelphia semiconductor index, covering the 30
largest US companies involved in the production and sale of
semiconductor products, has declined sharply in the year-to-date in
line with the trend in our Global Electronics New Orders Index,
while demand concerns are also weighing on wider tech stocks.

Nevertheless, the supply issues have spurred some action by
policymakers to insulate their manufacturers from external shocks
in the future. The US has signed a
bill into law to support domestic semiconductor manufacturing,
while other microchip makers are also reportedly planning big
investments into US production. Other countries may also look at
ways to re-shore supply chains in a bid to protect their industries
from external shocks.

Joe Hayes, Senior Economist, S&P Global Market
Intelligence
Tel: +44 1344 328 099
joseph.hayes@spglobal.com

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Purchasing Managers’ Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.