The semiconductor industry is highly volatile. The booms follow the busts with frightening speed.
These are not normal times. But even in normal times, conditions are unpredictable.
Semiconductor shipments can soar 70% one year and crash 40% the next.
In this video, I want to think about the semiconductor business cycle. Right now, we are
working through a big chip shortage. I wonder how soon before that turns into a glut. With everyone
racing to build or expand their fabs, maybe sooner than we might think. But I do want to note, don’t
expect me make any this year or that predictions in this video. Just a bunch of scattered thoughts.
Let us start by looking at the dynamics of demand and supply.
When things are planned out well, then capacity can be forecasted, shortages avoided, and
everything will be fine. The chairman of Foxconn said this recently about the recent shortages:
> Since most of the customers we serve are large customers, they all have proper
precautionary planning ... Therefore, the impact on these large customers is there, but limited
Of course, the hard part is the actual forecasting. End users do not directly
buy microchips in large quantities. Instead, the chips are purchased by vendors who put
them into consumer goods like PCs and smartphones that the users then buy.
These chips don’t last long on the proverbial shelves. There is always a new product coming
out this or next season that threatens to make your current iteration obsolete. Missing an
annual launch cycle like what happened with AMD in the mid 2000s can have dire consequences for
the whole company. For more information about that, you can watch my video about AMD and TSMC.
So foundry customers are always wanting to get them made and shipped yesterday.
Their concern about securing stock in uncertain times can lead them to double book orders,
which means exactly what it sounds like.
TSMC Chairman Mark Liu cites double booking as one of the major reasons why the shortage is
not as bad as it looks. He blames this double booking on a number of very legitimate reasons:
the pandemic and the recent China-America trade tensions. The latter of which is the
bigger concern. No end in sight for that one so we should expect some double booking to continue.
Demand is also heavily impacted by the greater macro-economy. It makes sense. Electronics are
consumer items and consumers buy fewer iPhones and laptops when times are tough. For instance,
three downturns in the semiconductor business cycles can be attributed to oil shocks in 1975,
1982, and 1991. Another from the Asian Financial Crisis of 1998.
Everyone might be howling about semiconductor shortages right now,
but we forget that in March of 2020 the stock market was down 25% and
experts were saying that the world economy was falling to bits.
Back then, companies were doing all they can to cut their expenses and hunker down.
But a flurry of stimulus packages and money printing meant that the economy bounced back
faster than anyone ever anticipated in Q3 2020. I don't think anyone predicted that would happen.
So that is macro. Everyone talks about macro but here is something interesting.
A study in 2005 found that what is more significant in the triggering of semiconductor
down cycles is not a decrease in demand. Rather, it has more to do with surges in semiconductor
inventory levels and fab capacity. In other words, over-supply rather than under-demand.
This makes sense to me. It is not like foundries and semiconductor companies
have never heard of the business cycle. But rather, the nature and economics
of the industry force them to make like rabbits until the whole thing collapses.
First, let us start with the fab. A fab costs a lot of money to build.
We all know about Moore's Law. Not an actual natural law but rather an industry
observation that the number of transistors on an integrated circuit doubles every two years.
It is famous and everyone likes to talk about it.
But not as well known is Moore's Second Law. Also known as Rock's Law, named after one of
Intel's early investors. It states that the cost of semiconductor tools doubles every four years.
Such tools represent 75% of the total cost of the fab, driving them upwards.
In 2000, a leading edge fab cost a billion dollars, twice as much as it was in 1995.
In 2005, $3 billion. Now in 2020, TSMC's leading edge N5 fab in Tainan cost roughly $17 billion.
Its next generation N3 process fab (also in Tainan) is estimated to cost $19.5 billion.
Like with Moore's Law itself, Rock's Law is an observation and not a natural law.
As much research goes into slowing Rock's Law as it does into accelerating Moore's.
And there are a few techniques and financial methods that companies
have explored in reducing those costs. And they have their own trade offs.
Regardless, foundries still have to put up billions of
dollars before they can even start to compete.
Most foundries would like their new billion dollar fabs to make back their billion dollar
investments. But with the way the chip market is, those fabs start losing value almost right away.
It is like what they say about driving a new car off of the lot.
Much of these fab construction costs are fixed. But the marginal cost of
making another chip is basically nil. So you want to make and sell
as many chips as possible to amortize those fixed costs.
What happens is that supply hits the market, exceeds demand, and prices collapse. Everyone
starts making less profit. Market supply should pull back. But the foundries are
incentivized to sell every chip that they can possibly make. If they can generate even
a bit of gross profit that can contribute to their future survival costs, they sell.
Furthermore, the industry's titans - TSMC and Samsung - value market share over profitability.
They refuse to mothball capacity lest that business go to any potential competitors.
And because they have massive economies of scale, they can cause the market price
to plunge to essentially their survival price - far lower than everyone else's in the industry.
The result is a fierce downcycle that burns out the lower performers.
Companies go bankrupt and get bought out. Supply re-balances with demand
and the cycle resets itself once more. Waiting for the next chip shortage.
As they say in the Romance of the Three Kingdoms: "The empire, long divided,
must unite; long united, must divide."
I want to talk a bit about subsidies. There has been a lot of chatter in the news about
governments putting down cash to build fabs. China is doing it, with their $20 billion
semiconductor plan. President Joe Biden included $50 billion in his stimulus plan.
And the EU is putting together 145 billion euro for a 2-nm cutting-edge fab of their own.
I can't address all that I want to say here, but I want to get to some essential points.
In the US, there are two significant pieces of US legislation in the works:
The CHIPS act and the American Foundries Act. They would establish a R&D fund and
a 20-40% tax credit for the acquisition of semiconductor production equipment.
I think the tax credit's effects would be more short-term,
impacting three to five years or one fab generation. On the other hand,
I like the R&D fund, which I think will have longer term lasting effects. Especially when
it comes to spinning off public-private partnerships like the one that created EUV.
So I have mixed feelings about the whole venture. I understand the value of national sovereignty,
government involvement and investment in certain high-priority things. I recognize that I have
written a lot about TSMC and Taiwan, and thus might harbor biases. By now, you probably have
already decided for yourself whether or not I am some sort of shill or otherwise.
But I am also a big believer in commercial things having to pay for themselves.
Like with every other government action, subsidies create distortions. That is the whole point
of having them. The subsidy’s intention is to bring more manufacturing to the USA. It looks
like they will get their wish. 40% subsidies can do that. But unless the subsidies go on forever
(and they might! The government's spent money on dumber stuff before),
the subsidized fabs should have to stand up on their own two feet afterwards.
We will need to go back to Congress to get those credits renewed, right?
I bet then it gets a lot more scrutiny, especially once the politically powerful automakers get
their chips back, the F-150s are back on the lots again, and we are on to the next crisis.
I am doing this video because. Today, we are in the midst of a large build-out of fabs
across the world. Fabs are so hot right now.
TSMC is working on its Arizona fab. That has been going for a year now. And there have been
whispers that this small 20,000 wafer fab is being upscaled in size from the original plan.
Samsung is in negotiations on a major investment buildout of their Austin fab.
They are going to spend tens of billions of dollars on that as well.
Even the smaller, second-tier foundries are building out or upgrading their fab capacity.
There has been a flurry of press releases from all these companies,
none of whom with a process node under 10nm, about new sites and projects.
Global Foundries is spending $1.4 billion in expansion and moving up their IPO.
Maybe they need the capital. Maybe their Middle East investors think
they should strike while the iron is hot and cash out their shares.
And SMIC is getting money from the Shenzhen government to build a $2.35 billion project.
That wafer fab is expected to do 40,000 wafers a month once it is done in 2022.
Just a small sample of the recent news going on in the semiconductor world.
And my immediate thoughts is that it is a whole lot of capacity.
For instance, once TSMC completes its Arizona fab, the new facility will have about 25,000
to 100,000 wafer starts a month, depending on the final size they decide. Along with everyone else,
that is hundreds of thousands of wafers coming to the market over the next 1-2 years.
It would be irrational to say that that won't have any effect on the market once
that capacity is all at peak output. Did we really create tens of millions of chips worth
of demand over the past year? Now, people are starting to go back to school and the office.
Are PC Masterrace types or crypto miners buying that many new graphics cards? I doubt it.
The American government is not going to buy all of those chips. The Department of Defense
buys 1.9 billion semiconductors a year. If the TSMC Arizona fab does 50,000 wafers a month,
that alone is a theoretical 3.5 billion dies a month. One month.
So I am watching this build-out with some interest and curiosity. The chip shortage has
been in the Wall Street Journal and the Verge for a really long time. Semis are super hot
right now. I wonder how long this boom will last, and when the bust will inevitably happen.