Tag Archives: Semiconductors

Analysis: From chips to ships, shortages are making inflation stick

By Dhara Ranasinghe and Sujata Rao

LONDON (Reuters) – Soaring gas prices, staff shortages, a lack of ships — price pressures globally may be picking up faster than anticipated, challenging the view that inflation will prove transitory.

Central bankers, while adamant inflation will subside, are starting to concede it may stay higher for longer as a range of issues push up the prices of goods and services and lift future inflation expectations.

Their conclusions will ultimately determine how quickly policymakers unwind the trillions of dollars of monetary stimulus unleashed to ease the COVID-19 crisis.

“Will central bankers be more focused on growth and be a “bit behind the curve”? Or will they be more concerned about inflation and take the punchbowl away quickly?,” said Charles Diebel, head of fixed income at asset manager Mediolanum International Funds.

Here are five key elements in the inflation debate:

1/ GASFLATION

European and U.S. gas prices have soared more than 350% and more than 120% respectively this year. Oil is up around 50% and Goldman Sachs expects Brent crude to hit $90 a barrel by end-2021 from around $80 currently.

Gas and electricity make up 4.8% of the euro area harmonized-inflation (HICP) basket used by the European Central Bank. Rabobank reckons the price surge is a separate ‘shock’ that could add 0.15 percentage points (ppts) to its 2.2% euro zone inflation forecast for 2021 and another 0.25 ppts to 2022’s 1.8% projection.

Many economists see higher gas prices as here to stay, due to slowing U.S. output, rising costs of carbon emissions permits for polluters and curbs on the usage of dirtier fuels.

In China, where factory inflation hit 9.5% in August, power cuts have slashed output of goods from cement to aluminum.

These outages are a risk to end-users such as those in auto supply chains, Morgan Stanley said, noting “cost-push inflation and tightening upstream supply that could affect downstream production and profits.”

2/ CHIPFLATION

Semiconductors, or chips as they are known, are tiny but are having an outsized impact on global factories. At General Motors alone, chip shortages are seen cutting Q3 vehicle deliveries by 200,000, while falling output has sent used-car prices spiraling.

Chip prices have risen and semiconductor giant Taiwan’s TSMC is mulling further hikes of up to 20%. That will ripple across everything from electronics to cars and phones to washing machines. But chipmakers themselves face higher input costs from commodities to power.

“It does seem likely that these semiconductor shortages are going to persist into next year,” said Jack Allen-Reynolds, senior European economist at Capital Economics.

Or beyond. Intel’s CEO predicts chips will comprise a fifth of a car’s cost by 2030, from 4% in 2019 as vehicles become self-driving or electric.

3/ FOODFLATION

Global food prices rose 30% year-on-year in August, an index compiled by the UN Food and Agriculture Organization shows — a sign of broadening price pressures.

While higher agricultural commodity prices are behind the jump, JPMorgan analysts also attribute food price inflation to pandemic-related pressures such as logistics disruptions and transport costs.

In emerging markets, where food makes up a large chunk of inflation baskets, there is more pressure to tighten monetary policy. It is less of a problem for developed nations but price rises look inevitable for items such as soft drinks and snacks.

4/GREENFLATION

Stringent rules to guide the transition to a greener future are blamed for stoking ‘greenflation,’ for instance by shutting out polluting factories, vehicles, ships and mines, in turn reducing the supply of key goods and services.

Prices for European carbon emission allowances, have doubled this year to 65 euros a tonne. A price of 100 euros would lift European retail power prices 12%, adding 35 bps to headline euro zone inflation, Morgan Stanley estimated in June.

There are other examples. Falling ship orders due to upcoming rule changes on fuels may be a tailwind for shipping rates that have already surged 280% this year.

NatWest attributes the commodity rally at least partly to the shift to greener technologies raising mining and production costs.

All this may not fully have seeped into inflation calculations. For instance, markets see euro area inflation hitting 2% only after a decade, Danske Bank sees “upside risks to inflation expectations…once implementation of the green transition gathers momentum”.

5/ WAGEFLATION

As prices rise, so do expectations of future inflation among consumers, who accordingly demand pay hikes.

The carbon emission allowances picture is mixed. U.S average hourly earnings jumped 0.6% in August and U.S. five-year inflation expectations are running around 3%, surveys show.

In some UK sectors, earnings have risen as much as 30% this year. Euro area labor costs fell in Q2 but inflation as well as inflation expectations are rising.

“Maybe markets are a little bit extreme in their pricing, but I’m not recommending investors should fade that move,” Societe Generale senior rates strategist Jorge Garayo said.

“When we go into next year, that will be the big test.”

(Reporting by Dhara Ranasinghe and Sujata Rao; Additional reporting by Stefano Rebaudo ; Editing by Kirsten Donovan)

U.S. manufacturing output accelerates in May on autos

WASHINGTON (Reuters) – Production at U.S. factories increased more than expected in May as motor vehicle output rebounded, but shortages of raw materials and labor continue to cast a shadow over the manufacturing industry.

Manufacturing output accelerated 0.9% last month after dipping 0.1% in April, the Federal Reserve said on Tuesday.

Economists polled by Reuters had forecast manufacturing output increasing 0.6% in May. Manufacturing, which accounts for 11.9% of the U.S. economy, is being underpinned by massive fiscal stimulus, low interest rates and continued strong demand for goods even as spending is shifting towards services amid a vastly improved public health situation.

But robust demand is straining the supply chain, with shortages of raw materials and labor across the industry.

The automobile industry has been hit by a global shortage of semiconductors, which has forced some automakers to cut production. Hyundai Motor USA said on Monday it would suspend production at its Montgomery plant in Alabama for a week because of the chip crunch and will “will continue to take necessary measures to optimize production.”

Volkswagen said last week it expected the supply squeeze to ease in the third quarter, though it saw the bottlenecks continuing in the long term.

That suggests the 6.7% increase in production at auto plants last month was likely temporary. Motor vehicle assemblies jumped about 1 million units to an annualized rate of 9.9 million units last month, but remained more than 1 million units below their average level in the second half of 2020.

Excluding autos, manufacturing output rose 0.5% last month.

The rebound in manufacturing output combined with a 1.2% increase in mining and a 0.2% gain in utilities to boost industrial production by 0.8% last month. That followed a 0.1% rise in April.

Capacity utilization for the manufacturing sector, a measure of how fully firms are using their resources, rose 0.7 percentage point to 75.6%. Overall capacity use for the industrial sector was up 0.6 percentage point to 75.2%. It is 4.4 percentage points below its 1972-2020 average.

Officials at the U.S. central bank tend to look at capacity use measures for signals of how much “slack” remains in the economy — how far growth has room to run before it becomes inflationary.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)

U.S. chip subsidy effort faces pushback over China issues

By Stephen Nellis, David Shepardson and Michael Martina

WASHINGTON (Reuters) – A series of amendments for a $190 billion U.S. Senate bill aimed at countering China’s technology challenge are in limbo after business groups protested proposals intended to ensure that none of the money finds its way to China or other U.S. rivals.

New regulations or reviews of investments or deals in China could disrupt U.S. businesses’ future operations in that country, which include semiconductors and medical equipment. The bilateral trade deficit has run more than $100 billion a year since 2002.

Senators from both sides of the aisle want “guardrails,” such as mandatory security disclosures and interagency reviews to stop U.S. businesses from compromising national security by outsourcing critical technologies to China.

The Senate bill authorizes $120 billion for high-tech research and another $54 billion to subsidize U.S. semiconductor production. For chip factories, it makes no distinction between foreign recipients and U.S.-based firms in determining who gets funds for U.S. facilities.

A key goal of the funding is to bring the world’s most advanced chip plants to the United States, and only Taiwan Semiconductor Manufacturing Co and Korea’s Samsung Electronics Co Ltd have the technology to do that.

Florida Republican Senator Marco Rubio has proposed an amendment requiring U.S. national security officials to screen recipients and require disclosure of funding or support from foreign entities, including the Chinese government or Chinese state-owned enterprises.

TSMC and Samsung both have operations in China.

Another amendment from Democratic Senator Bob Casey and Republican Senator John Cornyn would require an interagency review of any U.S. investments in China or a shortlist of adversarial countries. That would mark a huge change for U.S. law, which for decades has had provisions for screening inbound investments, but not for outbound.

“If a company wants to offshore semiconductors to China, we need to know about it,” Casey said from the Senate floor on Wednesday. “Yet, business interests, like the U.S. Chamber of Commerce and the U.S.-China Business Council, are organizing against this commonsense proposal.”

Casey took to task Republicans opposing the measure, saying they talk tough on China, but they “cut and run” when it comes to taking on big business.

John Murphy, the U.S. Chamber’s senior vice president for international policy, said existing laws, such as the Export Control Reform Act of 2018 (ECRA), could address the China investment issue, and that the proposal needed more discussion in the Senate before being added to such a sweeping package.

“Congress and the administration should focus on using the legal tools on which the paint is barely dry,” he said, referring to ECRA.

One Senate aide cited fierce opposition to the Casey-Cornyn amendment from businesses and some Republicans, including Senator Mike Crapo, the ranking member on the Senate Finance Committee, adding: “We’re not confident that it’s going to come to a vote.”

Crapo declined to comment.

FUNDAMENTAL FLAW?

Senate Majority Leader Chuck Schumer has sought to get the U.S. Innovation and Competition Act passed this week, but Republicans insist the bill is not ready.

“There is an increasing consensus that the lack of guardrails is the fundamental flaw of the bill,” a Republican House aide said of the Senate package.

The House of Representatives is planning its own version of a China bill and could add other provisions on chips funding as well.

Rubio’s office said it was still working on getting his amendment incorporated. When he proposed his amendment for counterintelligence screening last week, he noted the much needed investments would “mean nothing if they are stolen by foreign adversaries, including the Chinese Communist Party.”

Any restrictions on subsidies to foreign companies would likely benefit Intel Corp, the long-time U.S. national champion in chip-making that has promised to redouble its efforts in the most advanced technologies and spend more than $20 billion on new U.S. plants.

Intel last year moved to sell off its only chip factory in China to SK Hynix.

Derek Scissors, of the conservative American Enterprise Institute, who studies China and security issues, said companies should be forced to make a choice.

“If you receive federal government money, you cannot expand your business in China from that point. The end. And if you don’t like that, don’t take the federal money,” Scissors said.

(Reporting by Stephen Nellis, Michael Martina and David Shepardson; Editing by Richard Chang)

GM hit by chip shortage, to cut production at four plants

By Ben Klayman

DETROIT (Reuters) – General Motors Co became the latest automaker hit by the global shortage of semiconductor chips as the U.S. automaker said on Wednesday it will take down production next week at four assembly plants.

GM said it will cut production entirely during the week of Feb. 8 at plants in Fairfax, Kansas; Ingersoll, Ontario; and San Luis Potosi, Mexico. It will also run its Bupyeong 2 plant in South Korea at half capacity that week.

GM did not disclose how much volume it would lose or which supplier was affected by the chip shortage, but said the focus has been on keeping production running at plants building the highest-profit vehicles – full-size pickup trucks and SUVs as well as the Chevrolet Corvette sports car. GM said it intends to make up as much lost production as possible.

AutoForecast Solutions, which tracks production, estimated GM’s combined lost volume would total almost 10,000 vehicles next week.

“Despite our mitigation efforts, the semiconductor shortage will impact GM production in 2021,” GM spokesman David Barnas told Reuters in a statement.

“Semiconductor supply for the global auto industry remains very fluid,” he added. “Our supply chain organization is working closely with our supply base to find solutions for our suppliers’ semiconductor requirements and to mitigate impacts on GM.”

Affected GM vehicles include the Chevrolet Malibu sedan, Cadillac XT4 SUV, Chevy Equinox and Trax, and GMC Terrain SUVs and the Buick Encore small crossover vehicle.

The chip shortage has led several automakers, including Volkswagen AG, Ford Motor Co, Subaru Corp, Toyota Motor Corp, Nissan Motor Co and Stellantis NV, to cut vehicle production.

Mazda Motor Corp is considering cutting its global output by a total of 34,000 vehicles in February and March due to the shortage, sources told Reuters on Wednesday. Nissan said on Tuesday it cut three days of production on the truck line at its Canton, Mississippi, plant.

The chip shortage is expected to cause production in the global auto sector to be 672,000 vehicles lower than anticipated in the first quarter, IHS Markit said on Wednesday. The forecasting firm expects the shortage to last into the third quarter.

AutoForecast Solutions announced lost production globally so far due to the shortage has totaled 564,000 vehicles and estimated the total impact this year could be 964,000 vehicles.

Taiwan, home to the world’s largest contract chip maker, Taiwan Semiconductor Manufacturing Co Ltd (TSMC) and other major tech firms, is at the center of efforts to resolve the shortage.

Taiwanese chipmakers have promised to increase production and the government has urged them to address the problem.

Taiwan economic officials will hold a virtual meeting with the United States at the end of this week to discuss supply chains, with semiconductor firms present.

On Tuesday, 15 U.S. senators, including some from key automotive states like Michigan, Ohio, Tennessee, Illinois, Indiana and South Carolina, urged the White House to work with Congress to address the chip shortage.

(Reporting by Ben Klayman in Detroit; Editing by Matthew Lewis)

Exclusive: U.S. considers tightening grip on China ties to corporate America

FILE PHOTO: The People's Republic of China flag and the U.S. Stars and Stripes fly on a lamp post along Pennsylvania Avenue near the U.S. Capitol during Chinese President Hu Jintao's state visit, in Washington, D.C.,U.S., January 18, 2011. REUTERS/Hyungwon Kang/File Photo

By Koh Gui Qing

NEW YORK (Reuters) – The U.S. government may start scrutinizing informal partnerships between American and Chinese companies in the field of artificial intelligence, threatening practices that have long been considered garden variety development work for technology companies, sources familiar with the discussions said.

So far, U.S. government reviews for national security and other concerns have been limited to investment deals and corporate takeovers. This possible new expansion of the mandate – which would serve as a stop-gap measure until Congress imposes tighter restrictions on Chinese investments – is being pushed by members of Congress, and those in U.S. President Donald Trump’s administration who worry about theft of intellectual property and technology transfer to China, according to four people familiar with the matter.

Artificial intelligence, in which machines imitate intelligent human behavior, is a particular area of interest because of the technology’s potential for military usage, they said. Other areas of interest for such new oversight include semiconductors and autonomous vehicles, they added.

These considerations are in early stages, so it remains unclear if they will move forward, and which informal corporate relationships this new initiative would scrutinize.

Any broad effort to sever relationships between Chinese and American tech companies – even temporarily – could have dramatic effects across the industry. Major American technology companies, including Advanced Micro Devices Inc, Qualcomm Inc, Nvidia Corp and IBM, have activities in China ranging from research labs to training initiatives, often in collaboration with Chinese companies and institutions who are major customers.

Top talent in areas including artificial intelligence and chip design also flows freely among companies and universities in both countries.

The nature of informal business relationships varies widely.

For example, when U.S. chipmaker Nvidia Corp – the leader in AI hardware – unveiled a new graphics processing unit that powers data centers, video games and cryptocurrency mining last year, it gave away samples to 30 artificial intelligence scientists, including three who work with China’s government, according to Nvidia.

For a company like Nvidia, which gets a fifth of its business from China, the giveaway was business as usual. It has several arrangements to train local scientists and develop technologies there that rely on its chips. Offering early access helps Nvidia tailor products so it can sell more.

The U.S. government could nix this sort of cooperation through an executive order from Trump by invoking the International Emergency Economic Powers Act. Such a move would unleash sweeping powers to stop or review informal corporate partnerships between a U.S. and Chinese company, any Chinese investment in a U.S. technology company or the Chinese purchases of real estate near sensitive U.S. military sites, the sources said.

“I don’t see any alternative to having a stronger (regulatory) regime because the end result is, without it, the Chinese companies are going to get stronger,” said one of the sources, who is advising U.S. lawmakers on efforts to revise and toughen U.S. foreign investment rules. “They are going to challenge our companies in 10 or 15 years.”

James Lewis, a former Foreign Service officer with the U.S. Departments of State who is now with the Center for Strategic and International Studies, said if the emergency act was invoked, U.S. government officials including those in the Treasury Department could use it “to catch anything they want” that currently fall outside the scope of the regulatory regime.A White House official said that they do not comment on speculation about internal administration policy discussions, but added “we are concerned about Made in China 2025, particularly relevant in this case is its targeting of industries like AI.”

Made in China 2025 is an industrial plan outlining China’s ambition to become a market leader in 10 key sectors including semiconductors, robotics, drugs and devices and smart green cars.

Last month, the White House outlined new import tariffs that were largely directed at China for what Trump described as “intellectual property theft.” That prompted Chinese President Xi Jinping’s government to retaliate with sanctions against the United States.

Those moves followed proposed legislation that would toughen foreign investment rules overseen by the Committee on Foreign Investment in the United States (CFIUS), by giving the committee – made up of representatives from various U.S. government agencies – purview over joint ventures that involve “critical technology”.

Republican and Democratic lawmakers who put forth the proposal in November said changes are aimed at China.

Whereas an overhauled CFIUS would likely review deals relevant to national security and involve foreign ownership, informal partnerships are likely to be regulated by revised export controls when they come into effect, sources said.

To be sure, sources said the Trump administration could change its mind about invoking the emergency act. They added that some within the Treasury Department are also lukewarm about invoking the emergency act as they preferred to focus on passing the revised rules for CFIUS.

FOCUS ON AI

Chinese and U.S. companies are widely believed among analysts to be locked in a two-way race to become the world’s leader in AI. While U.S. tech giants such as Alphabet Inc’s Google are in the lead, Chinese firms like Internet services provider Baidu Inc have made significant strides, according to advisory firm Eurasia Group.

As for U.S. chipmakers, few are as synonymous with the technology as Nvidia, one of the world’s top makers of the highly complex chips that power AI machines.

There is no evidence that Nvidia’s activities represent a threat to national security by, for instance, offering access to trade secrets such as how to make a graphics processing unit. Nvidia also said it does not have joint ventures in China.

In a statement, Nvidia said its collaborations in China – including training Chinese scientists and giving Chinese companies such as telecom provider Huawei Technologies Co Ltd early access to some of its latest technology – are only intended to get feedback on the chips it sells there.

“We are extremely protective of our proprietary technology and know-how,” Nvidia said. “We don’t give any company, anywhere in the world, the core differentiating technology.”

Qualcomm did not respond to requests for a comment, while Advanced Micro Devices and IBM declined to comment.

Nvidia is far from being the only U.S. tech giant, much less the only chipmaker, that lends expertise to China. But it is clearly in the sights of the Chinese. When the country’s Ministry of Science and Technology solicited pitches for research projects last year, one of the listed objectives was to create a chip 20 times faster than Nvidia’s

“Five years ago, this might not be a concern,” said Lewis, “But it’s a concern now because of the political and technological context.”

(Additional reporting by Diane Bartz in WASHINGTON; Editing by Lauren LaCapra and Edward Tobin)