In economic affairs, the phrase “when the US sneezes, the world catches a cold” refers to the influence the world’s largest economy has on other countries. It also reflects the fact that when there is a slowdown in the US, the rest of the world is likewise affected.
Today, China has become equally influential. This is seen in the technology sector, where the country — the largest consumer of semiconductor microchips — has gained notoriety for its crackdown on its technology companies.
When China wields its axe, there are serious repercussions on the wealth and business of its corporations. This is evident in the developments after Beijing started reining in the country’s tech companies in late June, following the listing of Didi Global Inc in the US.
Its tech billionaires — especially Tencent Holdings Ltd’s Pony Ma and Pinduoduo Inc’s Colin Huang — are among the dozens who have seen their paper wealth shaved off by almost US$90 billion (RM381.2 billion) since early July, when Beijing tightened its grip on the big tech companies and the influence they have on consumers.
The fear is that the next sector to come under scrutiny will be semiconductor companies, which produce microchips — key components for the making of memory chips that are universally used by manufacturers today.
Last week, Chinese regulatory authorities launched investigations into companies that supply microchips to automotive firms and other manufacturers. This came after a global shortage of microchips and a price increase that eventually caused disruptions in production schedules and a rise in the prices of consumer appliances.
The anti-trust authorities dispute the shortages, alleging that microchip suppliers are colluding to drive up prices, and are investigating possible hoarding and price gouging. Towards this end, the country’s anti-trust officials visited the foreign offices of Samsung Electronics Co Ltd and Micron Techonology Inc —among the top three semiconductor wafer producers in the world — in June.
China is not the only country that is concerned about the rising prices and shortage of microchips; the US and the European Union share the same view. But can the price of microchips be manipulated? And is the shortage artificial?
Ask the industry players and the answer is likely to be that it is almost impossible to manipulate the prices of microchips. They say the prices are based on supply and demand, and there are so many companies in the value chain that it is very difficult to manipulate them.
As for the hoarding of microchips, this took place in recent times only because of the US-China trade war under the Donald Trump administration. China’s Huawei Technologies Co Ltd, according to reports, was said to have stocked up on microchips for fear of not having enough supply due to the US’ sanctions.
The rush for microchips in the last nine months is attributed largely to a miscalculation in orders from the automotive sector.
Global automotive companies had apparently cut back on their orders for microchips at the start of the pandemic in March last year. However, as the demand for cars picked up in the second quarter, they came back strongly into the market.
Automotive companies employ the “just in time” (JIT) concept to source their components. This allows them to avoid holding large inventories and reduces their operating costs.
Going forward, to avoid shortages, these companies are looking at placing longer-term orders. One European automotive giant is even in the process of commissioning a plant to produce electronic microchips for cars.
Other reasons for the increase in microchip demand is the higher use of laptops and gadgets for working from home and for playing computer games during the lockdown. The rising price of Bitcoin has also had an impact on the sector as digital coin mining activities require high-powered computers.
Malaysian corporations have been a beneficiary of the global shortage and rise in prices of microchips. Of the eight new entrants on the top 40 richest list in Malaysia for 2020, five were owners of companies in the technology sector.
The likes of Greatec Technology Bhd’s Tan Eng Kee and the trio of Chu Jenn Weng, Siaw Kok Tong and Yeoh Shih Hoong of Vitrox Technologies Bhd are among the country’s top 30 richest corporate figures, based on the value of their shares.
The others are Goh Nan Kioh, who controls D&O Green Technologies Bhd; Oh Kuang Eng of MI Technovation Bhd and UWC Corp Bhd’s Datuk Ng Chai Eng and Lau Chee Kheong.
Their companies are all part of the value chain in the supply of semiconductor microchips, a sector that has seen double-digit growth in sales and improved prices during the pandemic.
From April to June this year, semiconductor sales were up almost 30% compared with the same period last year, and 8% more compared with the first quarter, according to data from the Semiconductor Industry Association.
The demand for semiconductors has continued to have a bearing on the results of companies involved in the semiconductor supply chain. In recent weeks, Inari Amertron Bhd and Greatech announced they had registered record profits in their latest quarters.
However, the shortage appears to have eased, which points to the likelihood that the fairy-tale run of companies in the sector is coming to an end.
The world’s largest contract chip manufacturer, Taiwan Semiconductor Manufacturing Co (TSMC), signalled three weeks ago that the global shortage of microchips had gone past the “crippling stage”. TSMC’s view is shared by international market research houses such as IHS Markit and other producers.
TSMC, Samsung and Micron are the largest foundry owners in the world and produce an important component to make memory chips. This is an area where China does not have a meaningful presence.
Their predictions of an easing in the microchip shortage, together with an announcement by General Motors of the US that it is resuming operations earlier than scheduled, point to a rebound in microchip supply.
Toyota of Japan, another automotive giant, has stated that its production is going ahead as planned.
The developments within the automotive industry and the scrutiny from China’s anti-trust authority on microchip producers suggest that an easing of the microchip shortage is emerging. Demand for chips will continue to grow but the extraordinary price increase and acute shortage that caused production disruptions seems to be over.
M Shanmugam is contributing editor at The Edge