Why the Semiconductor Shortage Is Here to Stay -- for Now

According to recent research, the average demand for semiconductor chips has increased about 17% in 2021 compared to 2019. In this Fool Live segment from "Semiconductor Revolution," recorded on Feb. 3, Motley Fool contributors Jose Najarro, Nicholas Rossolillo, and Will Healy discuss what investors can expect from the semiconductor industry in the coming year. 

Jose Najarro: A research done by RFI, Request for Information. They did a survey with numerous semiconductor companies to see how the overall shortage is still impacting right now the market. This is after, earlier this month, we actually got a report from the United States Department of Commerce that mentioned that, hey, supply shortages are still very heavy right now, most inventories in semiconductor companies are about five days of inventory compared to the normal of 40 days. I think that's insane how low it's gotten. This is an article by RFI or the report and they're saying that, hey, right now the shortage is still expected to continue at least the second half of 2022.

Obviously, the overall supply chain issues is a big impact on it. But not only that, just the overall demand of the new technologies that are happening right now, like artificial intelligence, like 5G and Internet of Things are also building up that unbalance between supply and demand.

Nick and Will, I actually have a question. Do you guys think if supply chain wasn't an issue, let's say COVID never happened and this is just some imaginary world that's say COVID did not happen, do you think because of this huge push of all these technologies, we would still see an unbalance between supply and demand? Maybe obviously not as big as we are seeing now due to COVID but do you think there would still have been some form of supply and demand unbalance due to the overall growth in new technologies?

Nick Rossolillo: I think it's without question that we would. Obviously, like you said, it wouldn't be as severe. But the fact remains, when you listen to executives talk about the supply issue with chips, they always talk about how demand was always there. It just got accelerated by the pandemic. Overnight the demand for next-gen consumer goods, consumer electronics just got pulled forward because now everybody is at home. Maybe an upgrade that they were planning a couple of years down the road suddenly, well I need it now, I need the new laptop right now.

Same on the business side, businesses that were maybe planning on upgrading a data center a few years down the road, OK, we need to do it now because suddenly everybody is trying to access this cloud service all at the same time. The demand was always there, so I think short answer is yes. It's just probably more severe now than it would have otherwise been. Historically, that's just what happens with the chip industry. You have these cycles of more demand than supply and then shorter periods every few years or so where there's a little bit too much supply and not enough demand.

Will Healy: Yeah, I agree with Nick. There would have been some shortage. Really people pretend like there's perfect balance. In the semiconductor industry, there's never balance. It's either there's not enough supply so all these fabs will get into high gear, they'll overshoot, and there'll be too much supply one day. It will happen again. It's just going to take longer because we had the perfect storm of demand increasing at the same time that supply fell due to COVID.

Jose Najarro: And some pretty cool findings in this report that I found interesting. One, they say that the average demand for chips have increased about 17 percent in 2021 compared to 2019. But the people selling the chips, they're not seeing an increase in supply. The demand is increasing but the inventory itself is not seeing the increase, and that's where they're seeing most of the overall unbalance.

The other thing that they do mention in this article is that the primary bottleneck across the board just seems to be on wafer production capacity. That's where most of the bottleneck is happening. Definitely where we've seen a lot of these like TSM, a lot of these wafer producers continue to do really well in the market right now.

I do want to say the other thing that they mention, they do say believe that the biggest hurdle in the semiconductor industry right now is the supply chain issues outside of production. There's no wiggle room for mistakes. If let's say we see an outbreak of COVID in one of these Southeast Asian countries where we see a lot of demand, and production slows down or we might see something happening with the actual shipment that can cause a lot of short-term harm to the overall market.