Horizontal Supply Chain Propagation from the Present Semiconductor Shortage

Abstract: This paper examines the effects from the present semiconductor shortage from a horizontal supply chain propagation perspective. Using relationships data from the FactSet Supply Chain Relationships database, I find evidence supporting that the shortage of semiconductors has propagated horizontally in the supply chains. Non-semiconductor firms supplying customers who are dependent on semiconductors suffer substantially from the crisis relative to firms with no linkages to semiconductor companies. These horizontally influenced firms have been affected negatively in terms of sales growth, profit margins, stock return and return on assets. To gain deeper insight into the driving forces behind the results, I split the main sample based on size, financial leverage and asset tangibility. This analysis indicates that the propagation effect for sales growth is mainly explained by smaller firms. For stock return, horizontally affected firms with higher leverage are more penalised. The results also suggest that firms with higher asset tangibility have suffered relatively more from the horizontal supply chain propagation. This study contributes to the literature on supply chain propagation as it examines horizontal linkages and digs deeper into how shocks propagate in the supply chains by examining more dependent variables than most other studies on the subject. The results in this study can be applied for other similar global supply chain disruptions of intermediate goods with none or few substitutes. Furthermore, as the semiconductor industry is vastly geographically undiversified, both when it comes to manufacturing and important input commodities, a new chip shortage in the future is not impossible. This evidence for horizontal supply chain propagation emphasises the importance of including corporate customers' horizontal exposures and dependencies in corporate finance analysis.