“Chip Crisis”: How and why was it created, is it coming to an end? And the great opportunity created for investors: This crisis, bottom line, is a result of a situation created in the young semiconductor industry whose soaring demand for its products, especially in the last decade and which has grown significantly in the last two years has led to a gap between large demand and low supply. The industry cannot meet these demands. This gap, which in fact has its roots at the turn of the century, has widened greatly in recent years mainly due to faster-than-expected technological advances (emergence of cloud systems, IoT, artificial intelligence platforms, etc.) that have led to dramatic increases in demand for semiconductor products. Autonomous vehicle to crypto.
This increase in demand for industrial products has encountered a problem arising from the initial production stage of this industry, the production of printed circuits, Which is carried out in foundries (semiconductor foundry, of the Tower type as an example), which for reasons we will explain later, mainly of the viability of investment, knowledge, cost and length of time required for construction, does not withstand the pressure of demand coming from the direction of consumption. For those who are interested in devoting time and understanding the production stages of the semiconductors we have brought the following article that even if you do not understand you will be able to appreciate the complications. In addition, we have brought an article in which you can get an explanation, in Hebrew, of any question about the circle.
In recent years, since President Trump boycotted trade with China, with an emphasis on Chinese high-tech and especially on chip companies, there have been, one after another, “external” events such as the corona, the Ukraine war, fears of a Chinese invasion of the “semiconductor monopoly, Taiwan “, Increases in raw material prices and energy. These events have widened the gap between supply and demand and the problem intensifies when it turns out that closing the gap between demand and actual supply is a very costly move, not so economical for investors in setting up chip factories that takes years to set up.
Did you think this is where the problems end? No!! These foundries are in fact a monopoly of 2 countries, Taiwan and South Korea, In fact of 2 companies, Taiwan Semiconductor Manufacturing Company (NYSE: TSM) and Samsung (NYSE: 005930.KS on the Seoul Stock Exchange) which control more than 71% of global production. But Taiwan, if we include other companies there and most of the production in China that is also done by Taiwanese companies, is actually alone responsible for 70% of global production and more importantly is the leader in producing printed circuit boards from hotspots. And unrecognized by most countries in the world (including its only “friend” the United States) and South Korea, which is threatened by the North, in fact controls almost 90% of all printed circuit board production in the world.
This situation, in which the production of the most important industrial resource for technological progress in the world is controlled by 2 companies in fact and in two countries that may be extinct (and both have similar threats to the Iranian threat to us), is not coincidental. Transferred, for economic reasons, the production of printed circuits to China, South Korea and Taiwan. Trump’s boycott of China has led to a shift of American companies from buying circuits from Chinese companies to Taiwan mainly, especially to TSM. The United States is currently waging a struggle to return production of the circuits to the United States.
Wall Street enters the picture: The chip industry, was one of the favorite industries for investors and analysts in the Wall Street technological boom of 1994-2000 and one of the ones responsible for inflating the 2000 bubble because of the dreams it created. This industry is no less “responsible” for the bubble burst in 2000-2 because of the assessments given by investors, encouraged by analysts, to the companies that represented the industry. After the 2000 bubble, the shares of the chip companies went into a coma that continued, more or less until 2009, when Main Street was making rapid progress.
The exit from the 2008 crisis and especially the advent of the smartphone and all the implications derived from it returned investors to the chip industry stocks and they returned to the status of “favorite analysts and investors”, a love that grew as the technology revolution provided new and disruptive products. In 2015-16 “space estimates” began to return to chip stocks and the reason for this was the understanding that the technology revolution is indeed changing the world (the success of TSLA and its peers) and the thought that the revolution is just beginning and there is no point in valuing technology companies according to regular accounting rules. .
But this time, unlike the 2000 estimates that relied on dreams alone, dreams, from AMZN to NVDA and from TSLA to NFLX, relied on rapid growth and incredible profitability, even starting a dividend distribution. In the summer of 2021, when the NASDAQ index broke the all-time high and reached 16212 it was 215% higher than the peak of 5132 until it reached the peak of the 2000 bubble when the experts said, “it will take generations, if any, to return to such levels.” But they They were wrong that on the way to 2021, most of the dreams of 2000 on Wall Street became a stunning reality on Main Street.
Between the beginning of 2018 and the end of 2021, the Nasdaq rose by 65 and it became clear that the dream effect was increasing its share in valuing companies above and beyond their business success, somewhat similar to its contribution in 2000. Which ended shortly and the rate of stock rises even rose until August 2021. This rise, regardless of anything else, necessitated a significant correction in values and especially in the second half of 2021 because the dream effect in stock valuations became the main valuation but rather the corona, due to vaccines and increases in consumption due to online commerce , Increased the dream effect and probably needed an external shock in order to correct the values and we have been writing this regularly since the 2018 highs.
The external shock city investors put Putin brought in the economic consequences of the invasion of Ukraine that led to sharp rises in commodity and energy prices, created a process of supply chain crisis, ignited inflation and raising interest rates and raised the fear of recession, such a band of black swans and no swarms.
The problem of manufacturing the circuits in the foundries became more severe after the corona burst when due to the fear of declining consumer demand and entering a recession led TSM and Samsung to close production lines in factories around the world, during 2020, to avoid stockpiling (inventory, in circuits, problematic because of rapid innovation). While declining production capacity in the foundries ignored the sharp rise in U.S. consumption initially and globally in the wake of it, a consumption that has risen especially for products and processes that semiconductors trigger online purchases, video games, fintech and quite a bit of cryptomania. Its government is moody to summon the 2 giants from Taiwan, TSM and Foxconn to set up foundries and electronic component plants in India to meet the demand and you will be surprised but also the soaring demand for smart homes in India is pressing.
The peak demand for chips, which reached suppliers in early 2021, along with the removal of Chinese production from the picture also exacerbated the supply crisis. In early 2021 the American automotive industry encountered a crisis of chip shortages and this provoked the White House and in February 2021 US President Joe Biden signed an execution order to address the chip shortage by various means and in April initiated a virtual meeting with CEOs of major technology companies and US government officials. In September 2021, another meeting was held at the White House where the President pressured automakers, chipmakers and others to provide information on resolving the ongoing crisis and in the same month convened European Commission President Ursula von der Lane. An urgent meeting of the Commission on the transfer of the “European Chip Law” which the EU will use to “push for increased resilience and sovereignty in the regional supply chain of semiconductors”.
In December 2021 India announced a “$ 10 billion allocation to entice printed circuit board companies to set up foundries in India” where the government will fund 50% of the set-up as a grant. And who are the candidates so far? Taurus (NYSE: TSEM), TSM and Foxconn. India, in the announcement, announces that it presents itself as a solution to the problem. At the beginning of 2021, the chip crisis erupted in full force and “helped” the black swans to lead to the current correction of the SOXX basket, for example, which in November 2021 reached an all-time high of 559 has since deteriorated by about 23%.
Is the solution close? As far as Main Street is concerned, no, because the problem at the moment is that closing the gap between demand and the supply of chips requires huge investments and a long time. Establishment of a foundry requires special preconditions such as temperature controlled environments, dust control, highly volatile equipment, regulatory compliance capability and a lot of knowledge along with a minimum of five years of time to prepare it for production. Not to mention the high cost of setting up a Fab. The construction of a semiconductor-only production facility is estimated to cost between $ 15 billion and $ 20 billion, and it is estimated that there are only eight semiconductor companies in the world that can meet such a cost, TSM, Samsung or Chinese SMIC as examples.
Most of the American chip giants, Intel, AMD, Texas Instruments and others, have actually left the field of foundries due to the economic inefficiency and inability to compete in Taiwan and China and they operate in the post-casting, design, systems, marketing, etc. stages. The only American circuit company among the 8 companies is GlobalFoundries (NYSE: GFS) which was owned by AMD and sold to a company from the Emirates that issued it last year. President Biden is pressuring these to return. The acquisition of Tavar by Intel is, without a doubt, part of the story that setting up a specialized foundry at the level of knowledge that Taur has accumulated will be extremely difficult today and Tavar is the right decision because of Intel’s “back”. “Add production lines relatively quickly and they, in my opinion and as is customary in the land of possibilities, are waiting for grants (for incentives) from the US Treasury. P between the countries, negotiations that began when Putin entered Ukraine
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So what do you do with the SOXX and the rest of the chip baskets? What will happen is that the prices of various circuits will rise first, since this is a crisis that has erupted due to excess demand. Check out, for example, who the 35 companies in SOXX are, the dream factor that almost inflated them, Intel did not acquire TSEM because the business is weak, on the contrary. It seems to me that SOXX and her friends are in the collection area and the moment of “opportunity” is approaching. The other option is to abolish the autonomous car, smart telephony, robotics and things like that and if that happens the SOXX will be in trouble.
* The above should not be construed as a recommendation for the performance of operations and / or investment advice and / or investment marketing and / or advice of any kind. The information presented is for information only and is not a substitute for advice that takes into account the data and needs of each person. Whoever uses the above information – does so at his own discretion and sole responsibility. The authors may hold some of the papers mentioned above.