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Market Overview Following the Supply Shortages, the Technology Industry Faces a Supply Boom

A commentary by Sebastien Mallet* | Translated by AI 2 min Reading Time

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For about 18 months, prices have been high in parts of the supply chain, leading to shortages and a decline in demand. As a result, customers have scaled back their requirements. But now the technology sector is entering a new phase of supply.

Upturn: The technology sector is entering a new phase of growth.(Image: Gerd Altmann / Pixabay)
Upturn: The technology sector is entering a new phase of growth.
(Image: Gerd Altmann / Pixabay)

In some sectors, it was primarily those companies that were willing to pay the highest prices that were able to secure the necessary components. This follows a decade of relatively limited growth in the supply chains for cell phones and PCs.

But now companies are busy expanding their capacity. Just as bottlenecks emerged in certain sectors during the economic upswing, supply is now likely to return at varying rates. In some sectors, it will be easier to expand capacity, particularly where China already has the necessary manufacturing capacity. In other sectors, this will take longer.

Relaxation Will Also Be Possible for Savings Accounts in the Future

Memory is a good example. NAND is challenging, but China’s NAND flash manufacturer YMTC (Yangtze Memory Technologies) could become a much more significant global supplier by the end of the decade. DRAM could be one of the last sectors where supply begins to rise again.

There are also parts of the supply chain that could benefit from these investments. Semiconductor equipment used by memory manufacturers is one area to keep an eye on, while the cycle for silicon wafers could also continue for a while.

There are also likely to be numerous duplicate or even triplicate orders in the system. When components are in short supply, customers naturally try to secure what they need from multiple sources. As more supply becomes available, we should get a much clearer picture of the underlying level of demand.

The Winners of the Boom

This raises the overarching question regarding artificial intelligence: Who will ultimately reap the returns on all this invested capital? There is little doubt that AI will change the world. However, that does not necessarily mean that every investment made today will yield an attractive return.

If computing power is priced incorrectly, AI services remain relatively inexpensive, and the barriers to developing new AI-powered products and services are low, who will ultimately pay enough to generate a return on the infrastructure that has been built?

China adds another dimension. Chinese companies may be willing to accept very low returns in their pursuit of market share, which could accelerate the supply response in parts of the technology ecosystem. AI will change the world. The question regarding investments is: Who will ultimately reap the returns on all the capital spent on building AI? 

*Sebastien Mallet is the Portfolio Manager for Global Value Equities at T. Rowe Price

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