Since the outbreak of the COVID-19 pandemic in late 2019, the world has been faced with unprecedented economic challenges that went beyond the macroeconomic aspects, i.e. contraction of global gross domestic product (GDP) and reduction of global trade, to hit the smallest units of the economic system.
The pandemic has posed a significant blow to the chips and semiconductors (which are essential components of technology across industries/ in technology products) industry.
According to an analysis by Goldman Sachs, up to 169 industries are likely to be hit by chips and semiconductors’ shortage, most notably the automotive and electronics industries, noting that industries that spend more than one percent of their GDP on semiconductors will be directly or indirectly impacted by the crisis. While Egypt isn’t an exporter of chips, it isn’t immune to the negative impacts of the crisis.
Causes of global shortage of chips and semiconductors
Several factors converged to exacerbate the chips shortage crisis. Chief among these factors was the outbreak of the Coronavirus which placed considerable pressures on the global supply chains and resulted in a decline in supply due to the closure of a large number of chips factories despite the high demand. Causes of this crisis could be summarized as below:
The precautionary measures taken to contain the pandemic resulted in a temporary shutdown of car factories. Amid expectations of a progressive decline in demand and the continued closure of production lines in 2020, most car companies worldwide had cancelled their purchase orders of chips.
However, reality indicated the contrary. The automotive industry had been revitalized faster than expected and sales had flourished in the last quarter of 2020 and the early months of 2021. For this, automotive manufacturers tried to speed up to reach high production levels again but chips factories could not respond quickly enough to the high demand due to a heavy delivery schedule. The following graph shows sales and production of cars in selected countries over five years.
Figure 1: Passenger vehicles sales in selected countries
Source: Knoema, passenger vehicles sales
As can be seen from figure 1, car sales showed an annual decline in all the selected countries during 2020 by 6.03 percent in china, 11.42 percent in Japan, 27.92 percent in the United States, 19.2 percent in Germany, and 17.85 percent in India. This decline came despite the recovery the industry made end of 2020 due to the inability to offset the accumulative losses suffered the whole year. However, the recovery trend is expected to continue during 2021.
Figure 2: Global car sales
Source: International Organization of Motor Vehicle Manufacturers, Global sales statistics
As illustrated in figure 2, the total global car sales of passenger and commercial vehicles decreased from 90.42 million units in 2019 to 77.97 million units in 2020. As for the worldwide automobile production, the below figure shows worldwide production from 2002 to 2020.
Figure 3: Worldwide annual car production
Source: Statista, Estimated worldwide automobile production
The previous figure reveals a decline in global car production during 2020, going down from 92 million units in 2019 to 78 million units, recording a year-over-year decline of 15.2 percent. This decline can be attributed to the aforementioned reasons.
High demand on electronics
Last year, most countries enforced full lockdown and declared curfew for longer periods aiming at containment of the Coronavirus. This translated into prolonged periods of time spent at homes which resulted in a heavy and remarkable demand on electronics either for entertainment, communication, work, or distant learning.
Smartphone shipments are anticipated to grow by 13.9 percent in the first quarter of 2021 and 5.5 percent for the entire year. The following figure presents data for the top five mobile phones companies during the fourth quarter of 2020:
Figure 4: Top five global smartphone shipments
Source: IDC Quarterly Mobile Phone Tracker
As is depicted in figure 4, mobile phone shipments for the top five companies have seen an increase during the fourth quarter of 2020, except for Huawei which is possibly due to the US sanctions imposed on it to limit its activities overseas.
US sanctions on China
Before COVID-19, the chip and semiconductor industry encountered pressure due to the trade war between the United States and China, which primarily affected Huawei. To reduce the impact of sanctions, Huawei started storing chips and Taiwan’s TSMC was its exclusive supplier, which placed pressure on the market.
The chip market is controlled by a small number of market players. The global shortage of chips has drawn attention to Taiwan’s mammoth role in manufacturing semiconductors, as it captures a larger share of the market as shown in the figure below:
Figure 5: Chips companies’ market share
As illustrated by the previous figure, Taiwan has got the lion’s share of the chips and semiconductors market, particularly TSMC whose market share reached 54 percent till early 2021.
In addition to all the previous reasons, a chip plant owned to the Japanese Renesas Electronics which supplies the market with about 30 percent of the microcontroller units used in cars was exposed to a fire last March, and it will will take about 100 days at least to restore full capacity.
The chip shortage crisis has many negative repercussions on several industries, some of which have already begun to emerge and others are likely to emerge in the coming period. Below, we detail these implications.
Decline of production in automotive and electronics sectors
According to IHS Market, the global chip shortage crisis could affect the production of about 1.3 million cars globally during the first quarter of 2021. The crisis forced many global automotive manufacturers to reduce production and accordingly adjust schedules and action plans.
In response to this crisis, a large number of global automotive manufacturers including Volkswagen, General Motors, Ford, Toyota, Daimler, and BMW, among others, have announced procedures to overcome the pandemic reducing production, shutting down factories, and temporarily laying off staff.
The automotive industry, however, wasn’t the only affected sector. The crisis also hit technology companies after seeing an improvement last year. For example, Apple delayed the release of iPhone 12 for two months due to the chip shortage. Samsung also warned that its operations might be affected by the chips crisis, thus confirming the transfer of the crisis to the technology sector.
In a related context, Gigaset, a manufacturer of smart phones and smart home appliances, indicated that about 80 percent of its production has been affected by the lack of electronic chips. Moreover, AVM stated that suppliers canceled chips’ purchase orders shortly before the scheduled time.
With shortage of supply in chip-dependent industries due to the decrease in total production and recovery of demand in the automotive and smart devices sectors, prices of products in these two sectors are expected to rise in the upcoming period. Xiaomi’s CEO pointed out to that stating, “chip shortage has increased costs which may pass on to consumers.”
Figure 6: Smartphones average selling price
Source: Stat Investor, Average selling price of smartphones worldwide
The previous figure show that the average price of smartphones is constantly increasing, with expectations of it reaching $317 by the end of 2021, a year-over-year increase of 2.5 percent.
Chip crisis and the Egyptian market
Egypt ranks high on the list of the automotive assembly industry in the Middle East and North Africa region. Until 2018, Egypt owned about 12 automotive assembly plants, with local components accounting for only 17 percent of the final product. The government aims to increase this percentage to 46 percent over the coming years.
Accordingly, the automotive sector in Egypt was naturally expected to be affected by the global chip shortage crisis due to its reliance on external components. In mid-April, Ghabbour Auto announced its inability to deliver the number of cars expected of it under the initiative of “converting and replacing cars to natural gas” launched by the Ministry of Finance due to Hyundai’s shortage of electronic control units.
The Egyptian automotive industry also suffered shortage of production inputs following the discontinuation of factories manufacturing electronic control units due to COVID. In this respect, Khaled Saad, Secretary-General of the Egyptian Automobile Manufacturers’ Association stated that vehicle manufactures face enormous difficulties during the current period due to lack of inputs, anticipating low productivity levels of local companies. Saad pointed out that companies participating in the initiative of “converting and replacing cars to natural gas” may experience delays in delivery or may even be not able to deliver if control units remain unavailable.
A predictable corollary of this crisis is the rise of prices of different car models, with an increase of about EGP 15,000 since the beginning of January. Besides the chip crisis, the deferment of imports of components of second-hand vehicles and the rise of cost of shipping vehicles by sea by 300 percent will have a bearing on the productivity of assembly plants in Egypt and will cause shortage in some car models in the upcoming period.
In sum, it all started with the coronavirus pandemic which affected the demand and supply in the chip market, with supply going down due to the closure of producing companies for prolonged periods of time and demand going up due to the fast recovery of the automotive industry and the growing demand on electronics, all of which has had an impact on the Egyptian market.