THIS MATERIAL IS A MARKETING COMMUNICATION.
The Case for Re-Shoring Global Supply Chains
The idea itself sounds counterintuitive. After decades of globalisation, multinational companies are now turning inward and localising supply chains. The global pandemic exposed vulnerabilities in supply chains across the globe, intensified by a shortage in labour, transport and logistics—all of which contributed to a bottleneck in supply, particularly for the semiconductor industry.
Yet COVID-19 was just the catalyst. A long, drawn-out tech rivalry and trade war between the US and China has brought two things to the surface. First, low-cost labour is no longer considered as crucial to global supply chains as companies prefer knowledge-intensive value chains, encouraging Chinese companies to move up the value chain in manufacturing and technology and boost domestic capabilities. Secondly, China is still largely dependent on foreign companies within the semiconductor supply chain.
The semiconductor industry generally has a higher entry barrier and a long investment cycle. Many companies had been unwilling to invest in the semiconductor industry until very recently. This has resulted in a small upstream presence—only a handful of companies in the world manufacturer leading edge semiconductors—in contrast to downstream global leaders that mass produce devices such as smartphones, PCs and hardware.
Supply Chains Make a Strategic Pivot
The auto semiconductor shortage this year reminds us of how vulnerable the global supply chain can be. Companies had to re-think just-in-time (JIT) processes, where a lean- and low-inventory approach worked well up until the coronavirus pandemic broke out.
In the wake of these events, major economies across the world raced to announce plans to localise semiconductor supply chains. The EU announced a new semiconductor alliance and a financial program to support local production. While the US Congress recently passed the CHIPS (Creating Helpful Incentives to Produce Semiconductors) for America Act, which aims to invest US$52 billion in US semiconductor chip production and research over five years.1 This is part of the wider US$250 billion US Innovation and Competition Act, which includes US$39 billion in production and research and development incentives, in addition to a US$10.5 billion grant for semiconductor manufacturing.2 As US-China competition intensifies, China has also ramped up its efforts to incentivise its domestic semiconductor industry with a RMB650 billion injection into its state-owned National Integrated Circuit Industry Investment Fund, otherwise known as “The Big Fund”.3
The practicalities of mirroring the same semiconductor capacity at home raises some questions. First, the cost of running a semiconductor fabrication plant varies significantly across the world. Additional capacity in the US and EU may not be as commercially competitive without the support of significant government subsidies. In light of the wide economic impact of COVID-19, most governments have a sizeable debt to service ratio. Secondly, redundant capacity could inevitably result in an oversupply and low utilisation of semiconductors, which will likely hurt all players involved in the semiconductor supply chain as prices fall.
Structural and Cyclical Trends Drive Longer and Stronger Upcycle
Three elements contributed to a strong upcycle, as semiconductor supply remained tight across 3Q20.4 This was likely driven by three factors. First, more people worked from home during the initial outbreak of COVID-19, boosting global PC shipments 26.1% year-over-year (YoY) in 4Q20.5 Secondly, increased demand for fifth-generation (5G) smartphones and subsequently creating supply pressure for smartphone chips. Lastly, limited mature node capacity expansion, auto makers underestimating the semiconductors required from foundries and combined with supply chain disruptions, have led to a significant auto chip shortage. As a result, we see a high utilisation rate across key foundries, some of which reached over 100% in 2020.6
Electric Vehicles Boost Demand for Power Semiconductors
Power semiconductors are becoming increasingly important, as the rise of electric vehicles (EVs) and automation is expected to create a strong demand for power semiconductors. In this field, Chinese companies are relatively small but gaining market share supported by local EV and electronic companies.
The development of the local EV industry in China is set to drive the local power semiconductor supply chain, similar to how domestic smartphone brands support China’s semiconductor industry. Although domestic power semiconductor players are relatively small compared to global leaders, China has already formed a local supply chain in power semiconductors with a combination of fabless, foundry and integrated device manufacturer companies.
Major economies are already ramping up efforts to ease supply chain tensions by investing in semiconductor development and manufacturing initiatives. As countries continue to turn inward and localise supply chains, it could ease the bottleneck seen in the semiconductor supply chain that has intensified for several quarters. It is those initiatives that could lay the foundation to a country’s up-and-coming domestic semiconductor industry.
Staying Ahead with Mirae Asset’s Latest Insights
1 Source: Reuters, 2021.
3 Source: Guoxin, 2019.
4 Source: Mirae Asset, 2021.
5 Source: Canalys 2021.
6 Source: Credit Suisse, 2021.
Disclaimer & Information for Investors
No distribution, solicitation or advice: This document is provided for information and illustrative purposes and is intended for your use only. It is not a solicitation, offer or recommendation to buy or sell any security or other financial instrument. The information contained in this document has been provided as a general market commentary only and does not constitute any form of regulated financial advice, legal, tax or other regulated service.
The views and information discussed or referred in this document are as of the date of publication. Certain of the statements contained in this document are statements of future expectations and other forward-looking statements. Views, opinions and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance or events may differ materially from those in such statements. In addition, the opinions expressed may differ from those of other Mirae Asset Global Investments’ investment professionals.
Investment involves risk: Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the Fund will generate a return and there may be circumstances where no return is generated or the amount invested is lost. It may not be suitable for persons unfamiliar with the underlying securities or who are unwilling or unable to bear the risk of loss and ownership of such investment. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the Fund and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Sources: Information and opinions presented in this document have been obtained or derived from sources which in the opinion of Mirae Asset Global Investments (“MAGI”) are reliable, but we make no representation as to their accuracy or completeness. We accept no liability for a loss arising from the use of this document.
Products, services and information may not be available in your jurisdiction and may be offered by affiliates, subsidiaries and/or distributors of MAGI as stipulated by local laws and regulations. Please consult with your professional adviser for further information on the availability of products and services within your jurisdiction. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Information for EU investors pursuant to Regulation (EU) 2019/1156: This document is a marketing communication and is intended for Professional Investors only. A Prospectus is available for the Mirae Asset Global Discovery Fund (the “Company”) a société d'investissement à capital variable (SICAV) domiciled in Luxembourg structured as an umbrella with a number of sub-funds. Key Investor Information Documents (“KIIDs”) are available for each share class of each of the sub-funds of the Company.
The Company’s Prospectus and the KIIDs can be obtained from www.am.miraeasset.eu/fund-literature/ . The Prospectus is available in English, French, German, and Danish, while the KIIDs are available in one of the official languages of each of the EU Member States into which each sub-fund has been notified for marketing under the Directive 2009/65/EC (the “UCITS Directive”). Please refer to the Prospectus and the KIID before making any final investment decisions.
A summary of investor rights is available in English from www.am.miraeasset.eu/investor-rights-summary/.
The sub-funds of the Company are currently notified for marketing into a number of EU Member States under the UCITS Directive. FundRock Management Company can terminate such notifications for any share class and/or sub-fund of the Company at any time using the process contained in Article 93a of the UCITS Directive.
Hong Kong: This document is intended for Hong Kong investors. Before making any investment decision to invest in the Fund, Investors should read the Fund’s Prospectus and the information for Hong Kong investors (of applicable) of the Fund for details and the risk factors. The individual and Mirae Asset Global Investments (Hong Kong) Limited may hold the individual securities mentioned. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Copyright 2023. All rights reserved. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of Mirae Asset Global Investments (Hong Kong) Limited.