💎 CFA Exam, Semiconductors, & Consumers (12 June 2022)


Demand is a summation of the “willingness” and “ability” of the consumer to pay for a product. Any change in one of the two variables changes the equation.

This week, let’s see how the demand side changed for the Indian consumers, CFA qualification, and semiconductors.

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Is the "hardest exam in finance" losing its sheen? Well, the numbers say so. CFA, which takes about 1000 hours of study over 3 different levels, spread across 12-18 months witnessed a significant fall in applicants for the 3rd consecutive year after the pandemic.

In 2019, 160,900 candidates globally took the level 1 exam. This dropped to just 73,688 in the following year, when the pandemic forced the institute to postpone the exam and go online. In the current year, just over 93,000 have taken the exam.

Applicants from Asia have been flooding into CFA exams, overtaking interest from any other region. China generally has the highest applicants (37% in 2019), followed by the USA (17%) and then India (14%).

One reason for the CFA’s popularity in Asia is that it offers a globally recognized credential to applicants. It is an alternative to internationally recognized schools, such as Harvard or Wharton where costs are far out of reach for most of them.

What has changed?

  • The pass rates have dropped to 28% for the level 1 exams, compared with an average pass rate of 41% over the past decade

  • In order to make up for their shrinking revenues during the pandemic, the institute hiked the fee by 29% for early registrations and 20% for standard registrations

  • During the pandemic, the exam went online, and with the rising workloads, many found it difficult to manage these long study hours with the job

Our take

The average age of a CFA applicant is 25 years: it's millennials exiting and Gen Z entering the group. And Gen Z believes more in experiential learning.

Many current CFA holders opine that the curriculum of the course is a bit outdated when it comes to the real job drill. Also, pandemic-related disruption had caused prospective students to question the relevance of the qualification to their careers. Time for the CFA institute to relook at the curriculum so as to pass the cost-benefit analysis in the eyes of the applicants.

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According to the CEO of the Mercedes truck brand, the company sees positive signs of moving past the global chip shortage that has plagued the auto manufacturers in the past year. Inventory period of semiconductor chips increased to 53 days in the first quarter of the year, from 42 days in the previous quarter.

Even as the global economy shows signs of weakness, with the pickup in the supply of semiconductor chips, the auto factories are back into action to meet the order backlog.

The pandemic story

Until the pandemic, the auto industry used to be a major consumer of semiconductor chips. But then due to lockdowns, the auto players paused their semiconductor orders. Meanwhile, with work-from-home habits, new industries like tech and electronics were gathering huge demand.

That's how the semiconductor supply shifted from auto to tech and electronics industries. Things again took a turn in early 2021, when auto demand revived suddenly but this time conductor supplies were in a crunch.

Semiconductor supply back to automobile sector

  • As economies reopen, consumers are shifting their spending back to services from goods, for example, travel has resumed

  • Because of rising inflation and falling incomes, the demand for smartphones and computers is declining hence chip manufacturers are directing the supply to the auto sector

  • Tech companies are losing their sheen both in the eyes of the consumers and investors and therefore the demand from AI and other data-centric industries is also down

Our take

In 2021, the auto industry faced the repercussions of halting the semiconductor supply orders in 2020. Now again, the economic cycle is changing with expectations of slowing growth. The auto industry is so far unaffected since they have past orders to fulfill, but during dynamic times like these, the tables might turn soon.

It will be interesting to watch how the auto players plan this phase, taking lessons from the past. And also they need to keep in mind the transition toward electric vehicles, which relies heavily on semiconductors.

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With inflation as high as 7.8%, consumers are taking different approaches to keep a check on their spending budgets. They are adopting a combination of down trade, downsize, postponing, or not consuming at all.

Amidst the ongoing scenario of falling demand and rising prices, it will be crucial to see the consumer purchasing patterns and how they are impacting the sales and profits of companies.

Companies already feeling the burnt

Nielsen reported that in the FMCG sector (for companies like Dabur, Nestle), the volume of sales shrank by 4% in the March quarter as compared to the last year. This happened after rising input costs forced the companies to hike the product prices.

Another such example is the paint sector, where the consumers have been switching to low-end unbranded paints from branded paints due to the rising costs. Since petrol, the main component of paints has led to a surge in prices, hence the downtrading.

Who will be impacted more?

  • Companies with a larger sales pie from the rural sector: FMCG players derive one-third of their demand from rural areas and therefore are faring with lower sales these days

  • Sectors, where the price gap between branded and unbranded players is significant: Post a 20% hike in branded paint prices recently, the gap with unbranded paints prices has gone up

  • Products, where consumption could be postponed: Say, in the case of paints, the purchase decision could easily be postponed by a few months

Our take

During such times, investors need to keep a check on their portfolio companies and the consumer demographics. Listed paint and FMCG companies are already seeing a drop in share price for the past few months due to a bleak outlook on sales and profits in the near future.

Many companies have come up with cheaper versions of the product by lowering the quality. Others have not increased the prices of the products but rather kept the same price point and decreased the quantity. Different approaches and only time will tell which one could help in retaining the consumption.

After last week’s story on global investments, we received good interest from our readers to understand more about the routes. Here’s an Explainer series that covers the two ways you can invest globally.

Did inflation make you change any of your buying decisions? Write back and share how are you managing your finances.