The "price mechanism" seems to have failed in this industry. So what's the problem?
By establishing a simple supply and demand model, this paper attempts to describe and explain the crux of the imbalance between supply and demand in the semiconductor industry, so that readers can better understand what happened in the market.
There are many reasons for the shortage of semiconductors in this round, but there are three main factors generally recognized by the industry：
Novel coronavirus pneumonia is the first to accelerate the global digital transformation under the outbreak of the new crown pneumonia outbreak. The demand for semiconductor chips in the automotive and mobile phone sector has increased significantly, and the demand for semiconductor products has been greatly increased.
The second is the impact on the supply side. The United States has suppressed China's science and technology industry, and the global semiconductor supply chain has been forced to restructure, which has led to a sharp contraction of semiconductor supply. Accidents such as cowid-19, Blizzard / earthquake / fire have further intensified the reduction of effective chip supply.
The third point is that under the expectation of short supply, manufacturers in all links of the industrial chain are hoarding. This paper attempts to explain the deductive process of semiconductor shortage tide by describing the changes of three influencing variables on the supply and demand model.
Stage one: initial state
We assume that the supply and demand of semiconductor industry is balanced before the above three variables affect the industry. It is assumed that the curve shape of supply and demand of semiconductor industry conforms to the law of supply and demand of general commodities. Therefore, we can describe the initial state of the supply and demand curve of a semiconductor industry：
There is a supply curve sloping up to the right in the figure, which means that there will be more supply quantity when the price of semiconductor products rises. The downward sloping demand curve D indicates that if the price of semiconductor products increases, the demand will decrease. At first, the industry is in equilibrium state E0, then the equilibrium price is P0 and the equilibrium output is Q0.
The second stage: the epidemic stimulates the housing economy and brings incremental demand
The "home economy" caused by COVID-19 has accelerated the global digital transformation and led to excess demand for the semiconductor industry. In addition, industrial changes in the automotive and mobile phone industries have brought a lot of incremental semiconductor demand. Because this kind of demand growth is very fierce, it drives the demand curve to move to the right, from D to D1.
But at the beginning of the industry level, although many people realize the rapid increase of demand, the viscosity effect of product price, the increase of demand does not immediately reflect the rise of price. At this time, the supply quantity remains at Q0, while under the existing price, the demand is Q1, the gap between the quantity of supply and demand q1-q0, and the market is shown as short supply in a small range.
The third stage: Science and technology war, epidemic situation and natural disaster cause semiconductor supply contraction
Although this is listed as the third stage, the actual process may be earlier than the second stage, but the process of the influencing factors is slower and far-reaching. The main means of China's science and technology war is the choice of "off supply" semiconductor industry in the United States. The result is that the uncertainty of global semiconductor supply chain increases, and the objective role is to reduce the effective supply of the whole industry. In addition, the global spread of epidemic and the continuous occurrence of natural disasters have led to the more or less impact on the supply of semiconductor industry, which is shown in the model as the supply curve moving to the left. The meaning is that the willingness of the manufacturer to provide the product at the same price is decreasing.
As the supply curve moves from s to S1, it means that the gap between supply and demand reaches q1-q2 under the current price of P0, and the market is seriously in short supply. In order to reach a new equilibrium, the price potential must be increased from P0 to P1, and reach a new equilibrium point E1. At this point, the equilibrium trading volume begins to approach the initial state.
The fourth stage: price expectations bring false demand growth
When most people in the industry realize that the price will rise sharply after the change of supply and demand in the industry, some transactions will rise first, for example, from P0 to PE. At this time, the clear price rise signal will make the buyers who are worried about the rising cost after the price rise and who are worried about not being able to buy the products increase their inventory reserves. In addition, some middlemen who hoard to earn the price difference will jointly increase the demand shown in the market, which is reflected in the model that the demand curve moves from D1 to De.
At this time, the gap between supply and demand reflected by the market will be the most serious. Under the price of PE, the demand will reach Q5, while the willing supply will only reach Q3. The gap between supply and demand will reach q5-q3, which is larger than q1-q2 before the price rise. This stage of the market often presents a quite magical feeling, that is, the higher the price, the stronger the demand. If we do not understand the causes and consequences of supply and demand in the whole industry, we will think that there is an upward sloping demand curve.
The red line Du in the figure describes the upward sloping demand curve, which is essentially the movement track of a certain volume price combination on the price curve in the process of the demand curve D1 moving to de driven by the expectation of price rise. But this kind of periodic upward sloping demand curve will make short-term speculators very interested, because buyers will buy more and more, and buy more and more, which has a great profit opportunity to buy low and sell high, thus boosting De to continue to move right, further verifying the existence of Du, so that more funds and players will join this arbitrage game. This can explain what's going on in the semiconductor market.
With the extension of Du curve, the gap between supply and demand will continue to enlarge with the rise of price, and the market will show an increasingly short supply, namely (q6-q4) > (q5-q3) > (q1-q2). Logically, because the extension line of the supply and demand curve will never intersect in the upper right direction, theoretically, unlimited price rise will not lead to spontaneous equilibrium of the market, and the gap between supply and demand may be infinitely enlarged until the system collapses. The price mechanism seems to have failed at this time.
Fifth: the change of semiconductor supply and demand from a long-term perspective
No one knows exactly how long the fourth phase will last. But this upward sloping demand curve will be unsustainable for a moment. Therefore, in the long run, we should still pay attention to the real trend of supply and demand curve.
The change of real supply curve depends on the time of global semiconductor supply chain restructuring and the completion of manufacturers' production expansion plan, and the real demand curve depends on the duration of marginal demand increase brought about by "home economy". It is difficult to accurately judge the duration of repeated orders and hoarding demand caused by the expectation of price increase. It may disappear immediately because of the change of expectation at any time.
As the global semiconductor manufacturers continue to increase their production capacity to meet the strong demand of the market, these production capacity will be released in the next year or two, and the global supply chain restructuring process brought about by the Sino US science and technology war will gradually show results, which means that the shortage of semiconductor supply will be alleviated and solved at some time in the future.
At this time, the supply curve of the industry will move back from S1 to s, even to S2 according to the current production expansion plan. At that time, a new equilibrium point will appear in E2. In the long run, the price mechanism is still working, not as easy to fail as it seems in the short run.
From the perspective of the moving track of equilibrium point, the theoretical track should move from E0 to E1 and then to E2 according to the red arrow. However, in reality, the common repeated order and stock behavior may make the equilibrium point move track reach the state of EE when the most track is. When the equilibrium point of EE is reached, once the supply tightening situation is improved, the market equilibrium point moves along the demand curve, as shown by arrow ①, it will show the price decline. At this time, if the market participants find that the price falls, they will stop the behavior of hoarding and repeated orders, and then the demand curve under the expectation of price increase will move to the left, as shown by arrow ②, until it is close to the real demand curve. Sometimes, the reverse deduction of this cycle will be very fierce. In order to avoid the loss of inventory impairment in the process of price reduction, the industrial chain refuses to order extra, watches carefully, even sells to reduce the inventory. It not only makes the demand curve caused by the price increase expectation disappear in an instant, but also may let the demand curve presented by the market move to the left away from the actual demand curve of the industry.
What will the semiconductor industry cycle go through?
The sales volume of the industry is equal to the price multiplied by the sales volume. Therefore, when the industry is at the E0 equilibrium point, the sales revenue of the industry is Q0 * P0, that is, the rectangular area surrounded by op0e0q0 in the figure. In the same way, we can compare the rectangular areas under four equilibrium states, and we can probably feel the track of the change of sales revenue in semiconductor industry.
It can be seen from the figure that the sales revenue of the industry in the fourth stage will be the largest in the whole supply and demand cycle. In reality, once the expectation of shortage price increase is abnormal, compared with other stages, the contrast gap of rectangular area may be more exaggerated and enlarged, so the process of deduction to the fifth stage may be more turbulent and intense.