When chips get tight

Because chip demand is no longer limited to computers and cars, economic sensitivity is decreasing. (Image: Shutterstock.com/Macro Photo)

The global semiconductor shortage is temporary in the eyes of many observers. Billions of dollars in investments are planned worldwide. However, Yan Taw Boon, chief Asia analyst at Neuberger Berman, sees the lack of chips as an indication of a general realignment in the semiconductor industry. Chip stocks would get a defensive face, he says.

For many, the semiconductor shortage is a passing phase. There is high demand for computers from the large number of home office workers, and the automotive industry is preparing to reboot the economy, he said. At the same time, she said, supply was tight because the industry was still operating under pandemic conditions, or – in Asia, for example – new restrictions were taking hold.

None of this is wrong, but it's probably only half the truth. The fact is also that the industry is changing fundamentally. Not only selected sectors need semiconductors anymore, but almost all industries. And instead of the economy, structural changes are increasingly driving demand. The pricing power of suppliers is greater than ever, and along the entire chip value chain, the need for capital is enormous, points out Yan Taw, director of research Asia at U.S. asset manager Neuberger Berman.

A problem of connectivity

The automotive industry has complained the loudest as the semiconductor shortage causes production to halt. For example, car manufacturers need classic chips rather than the high-performance semiconductors that are built into cell phones and smart devices. However, development and investment have focused on high-performance chips in recent years, so automotive chip production capacity is becoming largely obsolete and declining.

In other words, the real problem is not that automakers can't get chips. Far more serious is the failure of chipmakers to meet the demand for high-performance technology, despite their clear financial and strategic focus on this area, says Yan Taw Boon. He said this highlights how quickly the need for semiconductors in our devices is growing. Smart devices are becoming even smarter – and even appliances like the TV or the refrigerator are increasingly falling into this category.

With each new generation or technological milestone, the number of transistors per device grows, and so does the computing power of the chips. Each advance requires more research and development, capital, raw materials, engineering and ultimately time – on average between twelve and 18 months. "So semiconductor manufacturers can't just pull a lever to meet manufacturers' demand for cutting-edge technology", the expert of Neuberger Berman gives to consider.

In an increasingly digital and connected world, this leads to mutually reinforcing feedbacks: Each new technology enables innovation and new applications. That, in turn, is driving up demand for chips and advancing the development of new technologies.

"Not surprisingly, capital expenditures at the world's largest chipmaker, TSMC of Taiwan, are likely to rise more than 50% this year. Over the course of the next three years, investments of about 100 billion. U.S. dollars are being counted.", he added.

Aspect of national security

As more and more devices incorporate increasingly sophisticated semiconductors, many governments are becoming more concerned about their semiconductor supply chains. If industry productivity can only be increased with the latest technology in offices, factories and warehouses, sufficient access to semiconductors is important to a country's economic security. Then, when almost every device becomes a communications tool, it is potentially a national security issue.

The result is bans on trade in chips between some countries and companies. Other countries, on the other hand, are making targeted investments in domestic production to keep pace with the leading Asian manufacturing countries – especially Taiwan.

For example, U.S. President Joe Biden wants to spend 50 billion euros as part of his infrastructure program. US dollars for it. The semiconductor manufacturer Intel wants to invest. Investing US dollars in new fabs in Arizona. TSMC and Samsung plan to spend billions of dollars expanding their manufacturing capacity in Arizona and Texas.

The EU also wants its pandemic aid to double semiconductor manufacturing by 2030. South Korea has just generated 450 billion. U.S. dollars have been budgeted for the production of state-of-the-art chips, and India is offering companies more than 1 billion. US dollars if they build semiconductor factories locally. In China, too, semiconductor production is an important part of the new five-year plan.

Semiconductor shares change their property

All this is massively changing the semiconductor industry. For the first time in many years, manufacturers have real pricing power. "But the most important change is that the market is becoming less dependent on the economy. Structural developments are becoming increasingly important. Semiconductor stocks are becoming defensive", Says Boon.

Because chip demand is no longer limited to computers and cars, economic sensitivity is decreasing. There is also the change in consumer behavior: Apple used to be the only company that signed multi-year supply contracts for chips. Today, in view of higher demand, this is becoming the norm.

It is important to keep in mind that these changes do not only affect the semiconductor industry and its customers. They will have an impact on the entire value chain for chips.

Entire value chain needs a lot of capital

Special equipment is needed to manufacture semiconductors, such as ASML's lithography technology and Lam Research's technology for etching, depositing and cleaning semiconductor wafers. Special software is also needed for chip production. Software houses such as Cadence Design Systems, Synopsys and Siemens Mentor Graphics are therefore focusing on Electronic Design Automation (EDA) for this increasingly complex work with semiconductors. Boon assumes that a large part of the mentioned investments will benefit such companies.

Because nothing dominates the headlines forever, even the semiconductor shortage will eventually fade into the background. However, this does not at all mean that this issue is a temporary phenomenon. The semiconductor shortage is not the result of a short-term supply shortage, but is the result of rapid digitization and world politics. The growing need for capital along the entire value chain may be seen as one of today's most interesting investment themes.

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