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Home BUSINESS After a turbocharged boom, will chipmakers find themselves with an oversized bust?

After a turbocharged boom, will chipmakers find themselves with an oversized bust?

menorth 2021 graphics cards were hot stuff. Video game devotees and cryptocurrency miners queued overnight to get their hands on Nvidia’s latest high-end offering o amd, two American chipmakers. And graphics processors were far from the only hot semiconductors. An acute shortage of chips has disrupted the production of everything from smartphones to cars and missiles, just as it has increased demand for all kinds of silicon-based devices. Last year, the chip industry’s revenue grew by a quarter to $580 billion, according to namely, a research company. Chipmakers’ market values ​​soared. tsmca giant Taiwanese contract manufacturer, became the 10th most valuable company in the world.

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With demand expected to grow ever more insatiable, the traditional semiconductor cycle, the consequence of lag between demand and new supply, taking a year or two to build up, seemed to be a thing of the past. Chip companies opened their wallets (see chart 1). tsmc and its two main competitors, the American Intel and the South Korean Samsung, they invested $92 billion between them last year, a 73% increase from 2019, and pledged another $210 billion or so in total over the next two years.

Now it seems that, far from disappearing, the chip cycle may have accelerated, and all types of chips seem to be reeling. July 14 tsmc he said he would invest less than he had anticipated. Samsung has warned of stagnant profits and is said to be considering lowering memory chip prices in the second half of 2022. In June, Micron Technology, an American memory chip maker, forecast sales of $7.2 billion in the third quarter, a fifth less than expected. TrendForce, an analyst firm, expects memory prices to fall by a tenth in the next three months. By one estimate, graphics chip prices have halved since January, as the cryptosphere implodes and gamers spend more time in non-virtual reality. In the euphemistic words of David Zinsner, Intel’s chief financial officer, the rest of the year looks “much noisier than a month ago.”

As the turbocharged boom risks turning into a full-blown bust, the share prices of the world’s chipmakers have plunged by about a third this year (see chart 2), helping as much as the s&p 500 index of large American companies. On top of that, geopolitical tensions risk dividing a global market and tearing apart complex supply chains. The pandemic superstar industry suddenly seems a lot less stellar.

Start with the supply. One way that companies have been adding capacity is by installing new kits in existing factories (as chip factories are known). In the second half of 2021, global spending on equipment to etch chips onto silicon wafers rose about 75% compared to pre-Covid levels, estimates Malcolm Penn of Future Horizons, another research firm. These investments take about a year to translate into new production, so by the end of 2022 there could be excess production.

Companies can also build entirely new factories, which takes a bit longer. According to semi, yet another research group, 34 of these came online worldwide in 2020 and 2021. Another 58 are scheduled to open between 2022 and 2024. That would increase global capacity by about 40%. Intel has six factories in the works, including a state-of-the-art $20 billion “megafab” in Ohio and factories in Arizona and Magdeburg, Germany. Samsung’s plans include a large modern factory in Texas. tsmc is building a similar one in Arizona. Most of these are expected to start producing chips by 2025.

There was always the risk that the demand would have fizzled out by then. But the hunger for fries has subsided faster than expected. The clearest signs are in the market for personal computers (personal computers), which represent about 30% of the total demand for chips of all varieties. After a pandemic push when work and education from home became the norm, global personal computer shipments will fall 8% this year, estimates namely. That’s in part because some of those pandemic purchases had simply been preempted. Smartphone sales, another 20% of demand, are also expected to decline. In April, smartphone shipments in China, the world’s largest market, were a third lower than in the same month last year. The slowdown in personal computer and phone sales will be even higher if the global economy falls into recession.

Data centers and car manufacturing consume about a tenth of the world’s chips each. Demand is not expected to fall this year. But signs of softness can be seen. Chinese orders for server chips, which have abandoned power data centers. Many panicked automakers, meanwhile, have double or triple orders for chips to avoid the kind of shortage that forced them to cut production last year. past. Bernstein’s Stacy Rasgon, a broker, notes that in recent quarters auto chip shipments have been 40% higher than would be expected based on the number of cars shipped and the number of chips in a typical car. Large stock builds in the auto industry can mean a sudden drought of new orders.

The downward pressure on prices may be compounded by another powerful force. Political considerations, both domestic and international, are increasingly influencing chip supply and demand. On the supply side, last year’s crisis spooked governments and reminded Westerners that 75% of all semiconductors come from Asia. Many now want to bring manufacturing, especially of cutting-edge chips considered strategically important, within their borders. In the United States, Congress is discussing the chips Law, which, if enacted, would provide the industry with up to $52 billion over five years in subsidies and research and development (Correct&namely) subsidies. the EUThe version offers 43 billion euros ($43 billion) through 2030. India, Japan and South Korea have similar schemes. So does China, which launched a semiconductor policy in 2014.

State generosity could lead to more excess capacity. And interventionism can further damage prospects. A fragmented chip industry along national borders would risk pointless duplication, driving up costs for consumers. A report of bcga consultancy, and the Semiconductor Industry Association, a lobby group, conclude that in a scenario where semiconductor production is self-sufficient within regions, chip prices would increase by 35% to 65%.

The US government seems determined to curtail demand in another way. It is using export controls to deny Chinese buyers access to semiconductors and the tools needed to make them. The push is understandable: China is an authoritarian challenge to the US-led, rules-based global order. Awkwardly for chipmakers, China is also the world’s largest chip market. tsmc and Intel have already lost Chinese customers as a result of the US restrictions. Others, such as Qualcomm, note in their annual reports that Chinese customers are developing their own chips or switching to local suppliers, in part due to geopolitical tensions. American chipmakers warn that their big Correct&namely budgets would be hard to sustain if they lost the Chinese custom.

Political considerations are also a headache for others in the semiconductor value chain. On July 5, Bloomberg reported that asml, the Dutch monopoly in the $100 million market for lithography machines used to etch high-end chips, was under pressure from the US government to stop selling its equipment to Chinese companies. China accounts for 15% of asmlsales; its share price fell 7% after the news. The market values ​​of asmlAmerican providers, such as Azenta and mks Instruments, that is, slipped. Other US toolmakers, such as Applied Materials, ok and Lam Research, derive a third of their revenue from Chinese clients. All are in talks with US authorities to limit the sale of high-tech tools to China.

Chip bust can be smoothed out if the drive for silicon self-sufficiency sizzles. Continued subsidies would be needed to keep American factories at the forefront. That, in turn, would require sustained interest from easily distracted policymakers. This month, Intel said it would delay opening its factories in Ohio, blaming delays in approval of the chips Act. tsmc has said it may need to delay construction of its Arizona factory for the same reason. In April, Morris Chang, former president of tsmche bluntly called the US attempt to redirect chip production a “futile exercise”, pointing to high costs and a lack of engineering expertise.

In fact, removing state intervention and downturns in chip cycles have become more perfunctory lately, notes Ajit Manocha, who runs semi. That may be in part because the industry has become more consolidated. In the 1980s, about 20 companies competed in the market for memory chips. Today it is dominated by three: Micron, Samsung and South Carolina Hynix. At the forefront of microprocessor manufacturing, Intel, Samsung and tsmc they are the only companies capable of producing the most advanced equipment, down from nearly 30 companies in 2001. Few companies control a greater share of capital spending and can control it if supply exceeds demand. This will require chipmakers to rediscover capital discipline, something they haven’t had to exercise in a long time.

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