Global microchip imperative outstripping supply

‘To get to a supply-demand balance my forecast is 2023’: Mustek CEO David Kan

KEITH McLACHLAN: We now have David Kan, CEO of Mustek. We want to chat around the microchip shortage that’s happening globally. For the listeners’ benefit, microchips don’t just sit within your computers and mobile phones. They sit within your kettles and fridges and cars and everywhere; anything that’s electronic and is half-intelligent and performing a function uses them. So a global microchip shortage is potentially a devastating thing. 

Morning, David, and thanks for joining us. If we can just touch on the big picture – why is there a global microchip shortage if these are such important inputs into so many different things that the modern world uses?

DAVID KAN: Well, I think that ultimately the market prices solely depend on supply and demand. And in the past 12 months demand has shot up tremendously, due to the way that people live – that you have a lot more people working from home, you have a lot more people learning from home and so on and so forth, never mind the new applications such as 5G, artificial intelligence and so on. Those will add to the demand side. 

However, the demand can increase by say, 20, 30% overnight, but the supply or the manufacturing capacity takes time to catch up. I can give you one of the easiest examples: a few months ago the price of a kilogram of ginger jumped to R300, but last weekend I went to Checkers and I think that went back to R60. This is purely driven by supply and demand. As I said, the demand can shoot up, and the manufacturing capacity will take time to catch up. 

KEITH McLACHLAN: What Is your sense in terms of how long it will take the supply side of this equation to catch up with this elevated demand? Are we talking months? Is it going to rebalance later this year, or is it much further out – three to five years out?

DAVID KAN: Unfortunately, I don’t think that the manufacturing capacity can react so efficiently. For example, I’m sure you heard the news that Intel is going to go to a new plant in Arizona. And the whole market thinks this shortage is going to end very soon. But in fact, when you break the ground, making a new factory, till you can get to mass production with the correct yield rate, you are talking about two years, two-and-a-half years. So we don’t see that the shortage of microchips will ease off this year, never mind next year. I think it’s going to last until 2023.

KEITH McLACHLAN: Zooming in a little closer to home, being CEO of Mustek, you deal predominantly in the hardware side of this equation. As a domestic distributor, you will have a supply chain that reaches all the way back into this. A lot of the products you move have microchips in them. How are you finding this affecting your supply chain personally, and how are you managing to trade through this period?

DAVID KAN: Well, obviously you know all prices shoot up owing to the supply constraint. Most products are in allocation. Say, for example, you want to order a hundred units, they can only manage to give you 70 – some lower. So you just have to have, maybe, multiple sources. This guy can give you 30%, that guy can give you 40%, and so you try to get to the number that you want. 

But there’s one thing that is going to magnify or make the shortage even worse. Say, for example, that your manufacturing capacity at the moment is only 10% lower than the total demand, but buyers like ourselves, like any other buyers in the world, will do double- or even triple-booking, which will make the supply gap even bigger, and that is going to push the price higher. 

So in the short term, I think those who are double-booking, triple-booking certainly dominate again; and the market has to cool down. And I think that would take place maybe six months. But to get to a supply-demand balance my forecast is 2023. 

KEITH McLACHLAN: That’s quite a while to wait. It’s a fair point. It is well publicised that there is a shortage. So stockpiling is definitely some of this ramped-up demand and stockpiling itself is not permanent demand, it’s actually temporary.

That was David Kan, CEO of Mustek. Thank you very much for your early morning.

Listen to Thursday’s full MoneywebNOW podcast here.

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