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February 26, 2021 | GSAM Connect

Credit Check-in: Semiconductors – Powering 21st Century Structural Shifts

A global semiconductor shortage has delayed manufacturing of products—including cars and smartphones—that are reliant on the hidden chips that help power them. The shortage is driven by:

1. Elevated demand for electronic devices during lockdown life and a rapid rebound in auto demand, which has normalized since the second quarter of 2020 (when demand was one fifth of its usual level).

2. Insufficient supply due to a lack of investment, a departure of manufacturers from the sector (given high R&D costs), and limited inventories at both chip suppliers and auto manufacturers themselves. The latter dynamic signals the importance of “Just-in-Case” rather than “Just-in-Time” inventory management.

Recent developments have caught the attention of global governments given the structural importance of the digital economy, and the role electric vehicles will play in the climate transition, both of which will be powered by semiconductors. In Europe, seventeen member states are partnering to build chips needed for 5G rollout, while US chipmakers are eager for government funding as part of structural fiscal plans, and China is seeking to incentivize chip innovation through tax breaks.

What are the implications for corporate credit markets?

Robust semiconductor demand is not simply a function of economy reopening’s: it reflects a structural shift towards a more digitized and greener world. Semiconductor companies—who reported a 4% increase in EBITDA margins in the fourth quarter—stand to benefit from this demand tailwind. With respect to companies impacted by chip supply shortages, we think implications for investment grade companies will vary by company and sector, underscoring the importance of security selection. For example, automakers reliant on chips from Japan—where supply shortages have been negligible—will likely face modest disruptions. Management teams from a range of sectors, including autos and technology, have acknowledged near-term challenges but on the whole, companies expect semiconductor supply-demand dynamics to normalize later this year.

Overheard at GSAM

Each month we feature quotes from our investment team, offering a glimpse into what we are monitoring and analyzing.

"I like to think of semiconductors as the oil of the 21st century as they are essential for powering the digital economy, as well as the climate transition given their importance for electrification of the auto industry."

— Corporate Credit Research Analyst | February 5, 2021

#autos #semiconductors

Source: GSAM. For illustrative purpose only. Note: Comments may be paraphrased.

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