Latest / Eh Sayers / Dude, Where's my Semiconductor?
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- Media Sound Bites “There's a global microchip shortage…” - CBC News “It is quite amazing when you think that just a component that, you know, is a couple of dollars, can really halt full production of a product that is worth tens of thousands of dollars….” - Economist Rebekah Young, CBC News “It's estimated Canada will produce just 1.2 million vehicles this year. That's down from 1.4(million) last year at far below the pre pandemic yearly average of 2.2 million…” -Jacquelin Hansen, CBC News reporter – (Scotiabank Economics, Wards Automotive) Tegan: And I have to buy a car. Lucky me! (Theme) Tegan: Welcome to Eh Sayers, a podcast from Statistics Canada, where we meet the people behind the data and explore the stories behind the numbers. I’m your host, Tegan. If you're like me, you’ve never heard the words "supply chain" before March 2020, and since then, you hear it all the time. You might have even heard that semiconductors are the new toilet paper, just like Wordle is the new sourdough starter. That's some pandemic humour for you. In all of this, I have to buy a car. This is definitely not the moment I would choose to buy a car, if I had the choice. One salesman I spoke to said that his job had changed quite a lot. He used to only deal with the sales side of the business, selling cars to people who wanted to buy them. But, his dealership was having trouble keeping enough cars on the lot, so for the first time, he had been tasked with also finding used cars to sell. All that to say that it was definitely not business as usual in the used car market. To understand what's going on, I turned to a colleague at Statistics Canada. Andrew: Hi, my name is Andrew Barclay. I'm an economist with Statistics Canada. Tegan: I’m in the process of buying a used car, and it’s much harder than I was expecting. It feels very competitive. By the time I’ve found a car online and decided I’m interested and reach out to the dealer, very often the car’s already been sold. What’s going on? Andrew: So, for almost half a year now, we've really started to see prices increase for passenger vehicles. And it's kind of a combination of multiple factors associated with the supply chain, associated with increased demand on the consumer side and just all of these things, kind of coming together. And, it obviously, it creates problems for people like you and when you're trying to pick out that perfect car and hope that you can negotiate a deal and all of those things. Tegan: You said the supply chain. What is the supply chain? I’ve been hearing that a lot lately and I don't know if I've ever really heard it before. Andrew: So, on a very simple level, supply chain is basically the process of taking, you know, a product in its original state and then, when it gets to you, it’s in its final state. So that could include things like, you know, natural resources: so, say how iron ore gets turned into aluminum or steel, and all the way down to eventually when you buy that car from that dealer and it's in your possession. So the whole supply chain is that, from that raw resource all the way to you picking your car up. Tegan: And why is that term, ‘the supply chain’, why do I feel it ever present in the news right now? Andrew: It's probably present in the news right now because we've seen kind of a unique time for price increases. So inflation in December was at 4.8%. That's the highest it's been since the 1990s and people are wondering why, why those prices increased. And one of the clearest reasons is because of disruptions to the supply chain associated with, you know, a number of factors, whether it's COVID-19 and people staying home or it's other factors like increased demand or shifting demand for different products. And then when people want something and they want it now and everybody else wants it now, those prices go up and that's where you hear the talk of the supply chain coming into effect. Tegan: Is it just cars or are there other products have been affected? Andrew: It's pretty broad based. We see food prices being impacted by supply chains, we see household durables, things like appliances and furniture, things that are imported from elsewhere in the world are often times facing increased prices, and that’s associated with it to some extent. It's associated with some of those supply changes through options that you've probably been hearing about it. Tegan: And is this uniquely a Canadian problem, or is it bigger than that? Andrew: It's definitely bigger than that. If you look, throughout the world, you'll probably, an indicator to some extent of supply chain disruption is an increase in prices. And we're seeing it throughout, the world from the United States, which had a, you know, the highest rate of inflation since the early 1980s. Europe, and the UK. All of these countries are kind of experiencing much higher prices and for the most— to some extent it's being caused by supply chain disruptions. Tegan: You talked about COVID-19. What are some of the other causes of these supply chain disruptions? Andrew: So, COVID-19 is kind of a big overarching theme and you can point to it directing other behaviors that are also, you know, partly responsible for some of these disruptions. So, for instance, shipping containers have become a lot more expensive. So shipping goods from Asia has become a lot more expensive and Canadians import certain products from Asia quite a bit. And those containers are both more expensive to ship and they're taking longer to get here. In the summer of 2019, it took about, you know, 40 to 50 days for a container to, on average, get from Asia to North America. Now it's about 110 days. So that kind of disruption stems originally, maybe from COVID, because there was an expectation that the downturn that was predicted with COVID-19 would be similar to the downturn that happened during the financial crisis in 2008, and that was that world trade would slow down. And, actually, the opposite happened. A lot of governments around the world supported incomes in probably unprecedented ways. So people were all of a sudden living at home and they were looking to, say, improve their house or their immediate surroundings. I mean, we heard a lot of things about, you know the sourdough revolution of everyone making sourdough at home. Well, Canadians took that that time to improve their immediate surroundings. They bought couches, they bought furniture, they bought those types of things. And that wasn't really necessarily expected and you had to ramp up production or you had to change supply chains to meet this new type of demand. So in a way, it all kind of stems from COVID, but there are kind of these secondary results that have occurred. There's other things that are more direct things like absences from work, so we've had, you know, slaughterhouses shut down because of COVID outbreaks within them, and that obviously impacts the price of meat. It is very overarching and it probably still comes down to mostly COVID impacting things and impacting behavior. Tegan: And what are some of the consequences of the supply chain disruption that consumers might see on a day to day basis or even in a bigger way? Andrew: We sometimes focus on seeing that the more affordability issues, the issues that people are dealing with on a regular basis, and that would be things like food prices or gasoline prices. And food is probably the biggest thing that people see on a on a daily basis. And food prices are really interesting because, I mean, we're all consumers, right? You and I are consumers and I see it when I go into the store. And that's probably the most relevant area where Canadians really see it on a regular basis. And that's where you get in, you know, shipping fees. That's where you get in weather related incidents. That's where you get into production-related industries where for any product that has any type of, like you know, refinery kind of process so like meat has to go through the slaughterhouse, but meat prices are influenced by how cheap it is to feed the animal, how much labor costs, how much it costs to ship to the abattoir. All of those prices go into things and it's probably the most relevant where people see it on a real day to day basis. Tegan: Is some amount of ebb and flow of product availability to be expected? Is it possible that we're just so used to having whatever we'd like to buy at our fingertips, and maybe that's actually the unusual thing? Andrew: So, I think that there is perhaps a level of impatience amongst modern consumers. I don't know that I have data to completely back that up but I think that some of those expectations are based on kind of the recent experiences of consumers where they haven't experienced shortages or they haven't experienced having to wait long periods of time. And I think much of that new experience can be partially attributable to COVID-19 and the pandemic and how producers have kind of had to, you know, jump back and forth about what they can expect from demand or what they can expect consumers to want. You know, like I always talk about the opening and the closing of restaurants and how producers of food have to change between the expectations of grocery stores and the expectations of restaurants. About what type of product they want and what type of product is consumed in each of those locations. So, when we eat food at home versus when we eat food at a restaurant is often times, you know, a totally different manufacturing process for food processors. So, when you think about any type of baking that that you do, often times you'll have a certain sized bag of flour. Well, that’s a different bag of flour for the restaurant because they're obviously dealing with higher volumes than you are as a, you know, someone feeding your family. Those manufacturers have to shift what the consumer wants. In one case, the consumer is the restaurant, in the other case the consumer is you or I who are purchasing at a grocery store. And those kinds of shifts aren't, they don't happen quickly. If they do happen quickly then they still have costs associated with them and those higher costs are going to be pushed along to the consumer. Now, the problem is that they also take time and those time lags is where it runs into, probably maybe addressing what you asked about, the just in time kind of consumption that we hope to have. The other core element is that, it is a unique period in recent history, around where disposable income is, and where it can go. So I don't wanna minimize anyone’s experience during the pandemic or minimize anyone’s struggles to, kind of, make ends meet during the pandemic, but there has been a tremendous amount of savings going on in the economy. So, for six consecutive quarters we've had double digit savings. And a lot of that savings has gone towards new houses, or houses in general and we can see it, you know, with the housing market in the state that it is, but a lot of that money is also gone towards paying down debt and other things. But it also hasn't gone towards travel or going out to dinner or things like that and it's gone towards the same thing for everyone. And that includes, you know, improving your immediate surroundings. So it may be buying that new big screen TV or buying that new furniture. And when everyone is doing it at the same time then that, ‘just in time’ becomes problematic because producers aren't used to, waves of demand. You know, they're used to more consistent gradual demand or continuous demand as opposed to kind of everybody purchasing it at the same time. It's probably also reflected in some of the increase that we've seen in purchase of passenger vehicles. So cars have become more expensive. Part of the story is the semiconductor issue but another part of the story is that Canadians as a public health measure, have been removed. Canadians can travel again. Canadians can drive around again and that putting off of a purchase, So why would you buy a car when you can't do anything with the car? It doesn't really make sense so when you can do something then Canadians start to consume it. And then, since we're all doing it at the same time, it leads to shortages or at least a price increases. Tegan: What's the link between supply chain disruptions and inflation? Andrew: Supply didn't, supply chain disruption would kind of have multiple impacts. The first is that you probably have lower production. Or an item is stuck somewhere. You know, in the case of personal passenger vehicles or cars. A lot of the cars have been finished, they just need the semiconductor chip to be added. That car can't go to the consumer at that point in time. So because there's fewer cars, you know it's a simple economics 101. You know there's high demand or there's stable demand or something associated with demand is stable. And you have lower production, so you have more people chasing fewer products that leads to higher prices. Tegan: Yeah, we've talked about a bunch of different factors which, as you say, you know, weather it might not necessarily be considered a part of the supply chain, but it certainly has an effect so that, you know, weather, labour you're talking about, shipping container issues, COVID-19, consumer behavior and purchasing patterns, consumers who for whatever reason have access to more cash. There are a lot of different factors at play here, and yet we talked about the supply chain as though it's a simple issue to fix, but that's not the case at all, is it? Andrew: No, no, no, here, you're absolutely right in your analysis. It's complicated and it's, there are many factors, kind of, at play. If we take something like semiconductors, you know, couple years ago now, but back in the before times as I say, you know, there was a lot of political conflict associated between some superpowers. And, there was concern among certain telecommunications firms that they might be cut off from access to markets. And they behaved accordingly. Now other telecommunications companies in the same industry saw what was happening and behaved in a similar way. Now, that indirectly, you know, lead to supply chain issues. And when COVID happened, auto companies responded in a certain way with certain expectations about planning. And once those projections were, or those expectations were proved incorrect, they had to change their behaviour again, and by that point they were kind of at the bottom of the queue for semiconductors. And all of those things are really interconnected, so it comes from telecommunications to, you know, political situations, to demand, to COVID. And it is very interrelated and things can influence, kind of, other things. For food prices, for instance. Natural gas is a key input in food prices. And, you know, a particularly cold winter in Europe can drive up international prices for natural gas. Which influence the input prices that go into food, which then influenced the price of food, manifesting itself for consumers. Tegan: What do you hope listeners get out of this episode? Andrew: So, first of all, I think it's really important that we recognize that we're kind of all in this together and at higher prices are frustrating for all of us and I certainly sympathize with everyone kind of experience. I think what we need to know what we want. What I'd like to get across or, what we maybe should be focused on, is that the supply chains aren't the sole reason for why prices are increasing. And it's not necessarily a clear causation between supply chain disruption and then an automatic rising in prices. There's lots of factors that go into prices, and there's lots of determinants of prices. In the grand scheme of things it's mostly supply and demand, but there are other things that are happening. I want to emphasize that it is complex. I think, the complexity that's associated with higher prices aren't strictly down to supply chain factors. There are a handful of other things that are happening, whether that's firms changing prices, whether that's higher demand, whether that's disruptions to supply chain or disruptions in general that can factor into prices. When things change, it generally manifests itself in higher prices for consumers. So, if things can kind of get back to quote, unquote, normal. And consumers start to behave the way, or we start to consume in the way things were prior to the onset of the pandemic, then that's when we can kind of expect more stability in prices, more stability in that price change area. Tegan: If someone would like to learn more about the supply chain, where can they go? Andrew: Where you can go, I think, to kind of understand where prices are changing the most for you as a Canadian or as a consumer, is to visit the Personal Inflation Calculator. Tegan: If you heard our recent episode on inflation, you might already be familiar with the Personal Inflation Calculator. This tool lets you see how much you’re being affected by inflation by calculating your own personal inflation rate. Find it on the StatCan website! Andrew: Everyone really has their own experience with inflation. You know, there's a difference between, say, someone who's a homeowner versus someone who rents or someone who's a vegetarian versus someone who consumes meat products. And using that personal inflation calculator can really see perhaps how those supply chains are eventually manifesting themselves in in higher prices for you individually. Tegan: For example, my personal inflation rate is now going to be affected by gas prices because, good news, I did manage to buy a car! It's a sedan. It's blue. And I'm happy! You’ve been listening to Eh Sayers. Thank you to Andrew Barclay for taking the time to answer all of our questions. You can subscribe to this show wherever you get your podcasts. There, you can also find the French version of our show called, Hé-coutez bien! If you liked this show, please rate, review, and subscribe. This is the last episode of season two, so we'd like to take the opportunity to thank everyone who contributed. Thank you to Janelle Bah, Sarah Messou-Ghelazzi, Martin Charlebois, Alexandra Bassa, and Tony Colasante for production support and to the subject matter experts and the many other internal teams who support this show. Audio engineering by Max Zimmerman and Jessie James McCutcheon. The logo was created by Vincenzo Germano. Thank you to Annik Lepage and Marc Bazinet for steering this ship. My name is Tegan Bridge, and I've been your host. And thanks to you, for listening! See you in season three!