FTSE 350: Chipping away at supply chain shortages

The global shortage of semiconductors that was emerging even prior to the pandemic's demand-boosting global lockdowns remains the biggest issue for the electronics sector. It can be viewed either as a source of strength or of weakness, depending on where a business sits in the supply chain.

For companies such as Renishaw (RSW) and Oxford Instruments (OXIG), which supply the chipmakers, additional demand has been a boon. Renishaw reported a 27 per cent increase in sales and a near-doubling of adjusted pre-tax profit for the six months to 31 December 2021, and said it expects full-year profit to be in the range of £157mn-£181mn, well ahead of the £120mn made in the prior year. Oxford Instruments also saw revenue jump by a fifth and adjusted profit by a quarter, despite having to increase working capital to strengthen its supply chain.

XP Power’s (XPP) semiconductor manufacturing equipment arm, which made up 39 per cent of last year’s revenue, also grew, but the company suffered shortages of important components, such as transistors and diodes.

For most others in the market, the chip shortage is a headache – at best, it has inflated costs but at its most acute it has disrupted production.

How long it lasts is a matter of some debate. Bank of America Securities recently cut its growth forecast for the European semiconductor market by 100 basis points, to 9 per cent this year and 5 per cent next, noting that expectations of a slowdown meant the PHLX Semiconductor Index has underperformed the S&P 500 by 17 per cent since its peak in November last year. However, just as chip supply and cost pressures were showing signs of easing, new lockdowns in China have provided further disruption.