Of the countless problems the Covid-19 pandemic has thrown at companies, a global shortage of microchips is one of the most pernicious. Eventually, the supply of chips will recover, but will affected markets then return to normality?
The likely answer is no. In dealing with the scarcity of chips and associated impact on production schedules, markets have helped to seed another crisis in the form of a global economic recession.
The scarcity of chips has hit a wide cross-section of industries, causing backlogs of orders for products including vehicles, consumer electronics and household appliances. Automakers have been severely impacted. According to one estimate by the US-based consulting firm AlixPartners, the global chip shortage cost the auto industry $210 billion in 2021.
The roots of the crisis stretch back to the early days of the pandemic. In the first part of 2020, the arrival of Covid-19 put a brake on economies worldwide. Demand for products and services fell precipitously as consumers stayed at home and governments imposed various restrictions on travel and in-person meetings. The GDP of the world’s largest economy – the US – fell almost 33 per cent in the second quarter of 2020.
As the crisis gained momentum, governments around the globe reacted by injecting huge amounts of money into their economies in various forms such as unemployment benefits, eviction moratoriums and cash grants. Central banks supported these policies in a number of ways, such as keeping a lid on interest rates.
In combination, the above developments laid the groundwork for a jolting increase in demand that was at the heart of the subsequent chip shortage. Governments’ largesse encouraged consumers to start buying again, and demand for products such as home appliances and cars, which are reliant on supplies of microchips, soared. Congestion and reduced capacity of transportation and warehousing afflicted the entire world economy. As consumer spending accelerated, companies struggled to keep up with the sudden turnaround in demand. The abrupt mismatch between supply and demand – and big increases in the cost of transportation and warehousing – dislocated the world’s supply chains, exacerbating product shortages in multiple markets.
Product shortages continue to plague markets today, and it will take some time before the supporting supply chains stabilise. Moreover, the behaviours that underpin the chip shortages are symptomatic of broader market dynamics that are creating conditions conducive to a significant recession.
A key driving force is a well-known supply chain phenomenon called the bullwhip effect. As today’s product manufacturers struggle to keep up with demand as well as unrelenting supply uncertainties, they often over-order, assuming that only a fraction of their orders will actually be fulfilled. They also assume that current demand will continue and grow. The next link in the supply chain, perhaps a parts distributor, receives the inflated order, inflates it further, and passes it to a tier-one supplier. The tier-one supplier does the same, as do all the other suppliers. By the time the order reaches small, sub-tier suppliers deep in the supply chain, it has become grossly proportioned. Orders that are far in excess of what buyers need are sometimes referred to as phantom orders.
No one knows when the shift in demand will occur, or how acute it will be
This scenario is playing out in the semiconductor industry, where over-ordering is widespread. Moreover, there are stories of manufacturers threatening to sue suppliers that do not fulfil their orders. But the same dynamics are at work in most industries, raising the possibility of a broad economic recession.
When demand eases off – as it will at some point in the future – companies will be left with inventories of products they can’t sell and parts they can’t use. The situation will deteriorate further as companies stop ordering. This is especially onerous for smaller suppliers at the end of the supply chain that lack the financial strength to ride out a steep fall off in demand and the cost burden of unsold inventory. In these circumstances, many enterprises will fail, thereby deepening the recession, as happened in the 2007-2008 global financial meltdown.
No one knows when the shift in demand will occur, or how acute it will be. But there are signs that recessionary forces are gaining steam. For example, central banks are expected to start raising interest rates soon in an attempt to curb inflation, actions that could help tip economies into a downturn.
There is also plenty of historical precedent that points the way to bullwhip-related market changes. An example is the 2008 global financial crisis. The bullwhip played out across a broad swathe of industry during that period, and the subsequent downturn caused manufacturers to cut inventories by 15 per cent as their sales declined by some 30 per cent.
As companies today grapple with shortages of parts and components, they should be aware of how the underlying causes of these shortages aided by the bullwhip effect could cause markets to pivot, and prepare for the worst.
COMPANY PROFILE
Founders: Alhaan Ahmed, Alyina Ahmed and Maximo Tettamanzi
Total funding: Self funded
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COMPANY PROFILE
Name: HyperSpace
Started: 2020
Founders: Alexander Heller, Rama Allen and Desi Gonzalez
Based: Dubai, UAE
Sector: Entertainment
Number of staff: 210
Investment raised: $75 million from investors including Galaxy Interactive, Riyadh Season, Sega Ventures and Apis Venture Partners
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UPI facts
More than 2.2 million Indian tourists arrived in UAE in 2023
More than 3.5 million Indians reside in UAE
Indian tourists can make purchases in UAE using rupee accounts in India through QR-code-based UPI real-time payment systems
Indian residents in UAE can use their non-resident NRO and NRE accounts held in Indian banks linked to a UAE mobile number for UPI transactions
SHAITTAN
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COMPANY PROFILE
Name: Kumulus Water
Started: 2021
Founders: Iheb Triki and Mohamed Ali Abid
Based: Tunisia
Sector: Water technology
Number of staff: 22
Investment raised: $4 million
World Cup final
Who: France v Croatia
When: Sunday, July 15, 7pm (UAE)
TV: Game will be shown live on BeIN Sports for viewers in the Mena region
Tips for newlyweds to better manage finances
All couples are unique and have to create a financial blueprint that is most suitable for their relationship, says Vijay Valecha, chief investment officer at Century Financial. He offers his top five tips for couples to better manage their finances.
Discuss your assets and debts: When married, it’s important to understand each other’s personal financial situation. It’s necessary to know upfront what each party brings to the table, as debts and assets affect spending habits and joint loan qualifications. Discussing all aspects of their finances as a couple prevents anyone from being blindsided later.
Decide on the financial/saving goals: Spouses should independently list their top goals and share their lists with one another to shape a joint plan. Writing down clear goals will help them determine how much to save each month, how much to put aside for short-term goals, and how they will reach their long-term financial goals.
Set a budget: A budget can keep the couple be mindful of their income and expenses. With a monthly budget, couples will know exactly how much they can spend in a category each month, how much they have to work with and what spending areas need to be evaluated.
Decide who manages what: When it comes to handling finances, it’s a good idea to decide who manages what. For example, one person might take on the day-to-day bills, while the other tackles long-term investments and retirement plans.
Money date nights: Talking about money should be a healthy, ongoing conversation and couples should not wait for something to go wrong. They should set time aside every month to talk about future financial decisions and see the progress they’ve made together towards accomplishing their goals.
What is a Ponzi scheme?
A fraudulent investment operation where the scammer provides fake reports and generates returns for old investors through money paid by new investors, rather than through ligitimate business activities.
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Silent Hill f
Publisher: Konami
Platforms: PlayStation 5, Xbox Series X/S, PC
Rating: 4.5/5
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Zayed Sustainability Prize
The burning issue
The internal combustion engine is facing a watershed moment – major manufacturer Volvo is to stop producing petroleum-powered vehicles by 2021 and countries in Europe, including the UK, have vowed to ban their sale before 2040. The National takes a look at the story of one of the most successful technologies of the last 100 years and how it has impacted life in the UAE.
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1. Fasting
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3. Hajj
4. Shahada
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One in nine do not have enough to eat
Created in 1961, the World Food Programme is pledged to fight hunger worldwide as well as providing emergency food assistance in a crisis.
One of the organisation’s goals is the Zero Hunger Pledge, adopted by the international community in 2015 as one of the 17 Sustainable Goals for Sustainable Development, to end world hunger by 2030.
The WFP, a branch of the United Nations, is funded by voluntary donations from governments, businesses and private donations.
Almost two thirds of its operations currently take place in conflict zones, where it is calculated that people are more than three times likely to suffer from malnutrition than in peaceful countries.
It is currently estimated that one in nine people globally do not have enough to eat.
On any one day, the WFP estimates that it has 5,000 lorries, 20 ships and 70 aircraft on the move.
Outside emergencies, the WFP provides school meals to up to 25 million children in 63 countries, while working with communities to improve nutrition. Where possible, it buys supplies from developing countries to cut down transport cost and boost local economies.
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At Everton Appearances: 77; Goals: 17
At Manchester United Appearances: 559; Goals: 253
PROFILE
Name: Enhance Fitness
Year started: 2018
Based: UAE
Employees: 200
Amount raised: $3m
Investors: Global Ventures and angel investors
Suggested picnic spots
Abu Dhabi
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Dubai
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Terror attacks in Paris, November 13, 2015
- At 9.16pm, three suicide attackers killed one person outside the Atade de France during a foootball match between France and Germany
- At 9.25pm, three attackers opened fire on restaurants and cafes over 20 minutes, killing 39 people
- Shortly after 9.40pm, three other attackers launched a three-hour raid on the Bataclan, in which 1,500 people had gathered to watch a rock concert. In total, 90 people were killed
- Salah Abdeslam, the only survivor of the terrorists, did not directly participate in the attacks, thought to be due to a technical glitch in his suicide vest
- He fled to Belgium and was involved in attacks on Brussels in March 2016. He is serving a life sentence in France
THE SPECS
Engine: 6.0-litre, twin-turbocharged W12
Transmission: eight-speed automatic
Power: 626bhp
Torque: 900Nm
Price: Dh1,050,000
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MATCH INFO
Champions League quarter-final, first leg
Ajax v Juventus, Wednesday, 11pm (UAE)
Match on BeIN Sports
