May 19, 2021
Global semiconductor shortages may curtail new equipment production, resulting in higher used equipment prices
The global semiconductor shortage is a real and growing problem impacting industries from automobiles and airplanes to farm and construction equipment. Over the past few decades our machines have become "smarter", which means they require a great amount electronics and sensors to operate. The increased dependence upon technology exposes the farm and construction equipment supply chains to hiccups in technology supply chains.
Semiconductor demand is very sensitive to economic growth. It historically has grown at a multiple of GDP. For instance, if GDP grows by ~3% then semiconductor demand will grow by much more than 3% (the opposite is true too when the economy contracts). The strong economic recovery over the past year has resulted in even higher demand for semiconductors.
Global manufacturers unable to procure semiconductor chips are forced to stop production. Three weeks ago Ford announced it will cut its second quarter 2021 production by ~50% due to the semiconductor supply challenges. Several other automotive companies have announced similar cuts.
Earlier this month thedrive.com published satellite photos showing thousands of unfinished Ford pickup trucks sitting idle in a lot awaiting missing semiconductor chips. The reduced supply of new vehicles for sale has a led to very strong growth in used vehicle prices (up 52% year over year in April, as reported by Manheim).
The rise in used vehicle prices is impacting national statistics and financial markets. US Consumer Price Inflation reported by the Bureau of Labor Statistics ("BLS") surprised Wall Street last week when prices rose 4.2% year-over-year, the fastest pace since September 2008. Much of the rise was driven by a 10% year-over-year increase in used vehicle prices (as measured by BLS).
It is important to note that the BLS uses adjustments when calculating CPI — these adjustments often "smooth out" changes. The 52% year-over-year gain in used vehicle prices as reported by Manheim is not an apples-to-apples comparison with the BLS numbers. We can expect strong upward pressure on BLS figures over coming months as it catches up with the Manheim index.
All farm and construction equipment manufacturers could face similar downtime challenges if supply chain problems persist. This could result in longer delays for new equipment shipments, as well as higher used equipment prices. Gary Truitt at HooserAgToday.com cited several instances of strained supply chains impacting the ag equipment industry today. It's important to remember that these issues are impacting many industries across the globe, and it is not something the manufacturers have much control over.
Many technology analysts have estimated that the shortage will persist for most of 2021, and it could span much of 2022 as well. New semiconductor manufacturing facilities are expensive and take a long time to build. In February President Biden signed an executive order to prioritize the administration's focus on resolving the semiconductor supply chain issues.
Used prices for farm and construction equipment have increased over the past year as a result of higher commodity prices and strong economic demand. We could see an incremental step higher over the next twelve months as a result of semiconductor shortages impacting new machinery production, as well as higher input costs (steel, copper, etc).
There is no easy solution to the semiconductor shortage. Many industries are competing for the same chips — automotive, aerospace & defense, off-highway equipment, consumer electronics (computers, TVs, etc), industrial robotics, and more. The panic is resulting in hoarding, which further tights the market.
We hope the situation will ease in the near future, but for now it looks like the tight environment will persist for at least another year.