A global shortage in semiconductor chips has been wreaking havoc on the tech sector, automotive industry, consumer electronics industry, and everything in between. After years of tepid demand, the COVID-19 pandemic spurred a huge consumer tech buying spree for personal computers, tablets, laptops, and gaming consoles leading to a chip shortage in other key sectors.
However, the automotive industry has so far been the hardest hit by the chip shortage--and for good reason.
Computer chips power everything in cars from antilock braking systems, infotainment screens, and bluetooth connectivity to collision-detection, transmission and the engine itself. In other words, without sufficient supply of chips the auto industry simply grinds to a halt.
For instance, General Motors (NYSE:GM) has announced that it will close three big factories and cut production at some other facilities through at least mid-March because of a several lack of chips. Ford (NYSE:F), Fiat Chrysler(NYSE:FCAU), Honda, Mazda, Subaru, Nissan and Volkswagen have also been badly hit. Overall, Axois has estimated that nearly 700,000 fewer vehicles will be produced globally during the current quarter with consulting firm Alix Partners telling Bloomberg that the global auto industry could lose a staggering $61 billion in 2021 as a result of the chip shortages.
But in the same vein, several leading chip makers could be perfectly positioned to benefit from these shortages.
The most interesting part: Chip costs have progressively been making up a bigger part of total car costs as the years and decades roll on.
Here are 5 chip manufacturers poised to benefit from the global auto chip shortage as well as the explosive demand for EV chips.
#1. Taiwan Semiconductor Manufacturing Co.
The fact that only a handful of chip manufacturers actually own chip-making facilities has made the situation even more dire. Indeed, many leading top semiconductor companies are "fabless," meaning they only design the chips but rely on other companies, known as foundries, to actually make the chips.The shift to outsourcing has been having a big effect on structural changes and related capacity because companies that cut orders in the early days of the pandemic have been forced to go to the back of the line.
Taiwan Semiconductor Manufacturing Company (NYSE:TSM) is the world’s largest contract chip manufacturer, meaning it’s tasked with making chips for dozens of fabless tech companies including Apple (NASDAQ:AAPL), Qualcomm (NASDAQ:QCOM), Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) among others.
Back in January, TSMC announced that it was not only “expediting” auto-related products through its wafer fabs but also reallocating wafer capacity in response to the global shortage of auto chips.
Taiwan’s economy minister has supported the decision saying that Taiwanese chipmakers were willing to prioritise auto chips supplies.
TSMC appears to be putting its money where its mouth is: Sales for TSMC’s auto chips jumped 27% from the previous quarter though they remained at just 3% of TSMC’s sales, lagging smartphones’ 48% therefore leaving plenty of room for ramp ups.
TSM stock is enjoying the bounty, up 12.7% YTD and 123.9% over 52 weeks.
#2. Nvidia Corp.
Back in January, a slew of vendors at the CES trade show in Las Vegas showcased systems and components for autonomous driving as well as those for its less sexy but more practical cousin, advanced driver-assistance systems, or ADAS in short.
Nvidia Inc. (NASDAQ:NVDA) and Intel Inc. (NASDAQ:INTC) were some of the leading chip suppliers that presented their ADAS systems. Although the near-term impact from ADAS on their earnings is likely to be minimal at best, they could still realize big gains by virtue of being at the frontline of the cutting edge tech.
Indeed, BofA Securities analyst Vivek Arya has in a research note said that the combination of ADAS and electric cars actually is emerging as a “key megatrend.” Arya has predicted that auto chip sales can grow at 25% a year or higher thanks to the dollar value of the chips in the average car doubling over the next year.
#3. Top Auto Chip Manufacturers
But ultimately, chip manufacturers with the greatest automotive chip exposure (revenue based) are the best way to play the upturn in the industry.
Top automotive chip companies in order of revenue exposure are:
- Renesas Electronics Corporation(OTCPK:RNECF)--51% revenue exposure
- NXP Semiconductors (NASDAQ:NXPI)--47% of revenue
- Infineon Technologies AG (OTCQX:IFNNF)--46% of revenue
- ON Semiconductor Corp. (NASDAQ:ON)--32% revenue exposure
- STMicroelectronics N.V. (NYSE:STM)--30% revenue exposure.
Citi analyst Christopher Danely has upgraded NXP Semiconductors from Neutral to Buy saying the company has "higher than average" exposure to semi upturns and downturns especially due to the high automotive exposure. Danely notes that the auto industry has been double ordering in a bid to cope with extended lead times amid the global chip shortages.
NXP has recorded the biggest consensus raise in Citi’s coverage universe during the latest earnings season and this trend appears set to continue throughout the upturn.
By Fred Dunkley for Safehaven.com