When will the semiconductor cycle peak?

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AMID TO CHIP shortage that has hampered producers of everything from toys to wind turbines, chip makers are spending. January 13 Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract manufacturer, said it would spend up to $44 billion on new capacity in 2022. That’s up from $30 billion last year, tripling number in 2019 and ahead of previous plans to spend more than $100 billion in total over the next three years. Intel, a US rival, plans to burn $28 billion this year. On January 21, it announced that it would build two major new factories in Ohio by 2025 at a total cost of $20 billion. An option to build six more later would bring the overall price to $100 billion. Samsung from South Korea, TSMC, the closest tech rival, has hinted that its capital spending for 2022 will exceed last year’s $33 billion. Small companies, like Infineon in Europe, are also splurging.

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CI Insights, a research group, estimates that industry-wide capital spending rose 34% in 2021, the most since 2017. This torrent of money is good news for customers of the industry. industry, which have been struggling with shortages for more than a year. For the industry itself, this is the latest iteration of a familiar pattern. Windfall revenues, like those reported by Intel on Jan. 26 and Samsung the next day, are forcing companies to ramp up capacity. But because demand can change much faster than the two or more years it takes to build a chip factory, these booms often end in busts. The chip industry has oscillated between overcapacity and undercapacity since its emergence in the 1950s, observes Malcolm Penn of Future Horizons, an analyst firm (see chart). If history is any guide, then a glut is on the way. The only question is when.

Soon, many analysts think. Demand for smartphones could slow, especially in China, the world’s biggest market. Sales of computers, which exploded during the covid-19 shutdowns, also look set to weaken, says Alan Priestley of research firm Gartner. A survey by Morgan Stanley, a bank, found that, partly because of shortages, 55% of chip buyers were double-ordering, artificially inflating demand. High inflation and impending interest rate hikes could hurt economic growth and cause demand to explode with it. Mr Penn expects the cycle to turn around in the second half of 2022 or early 2023.

This time the glut, when it occurs, may not affect all chipmakers equally. TSMC’CC Wei’s boss said this month that a correction could be “less volatile” for his business thanks to its position at the cutting edge of technology. Much of its new capacity is already reserved under long-term agreements with customers such as Apple, which needs a steady supply of the most sophisticated chips for its new iPhones.

The current cycle may differ from previous ones for another reason. Shortages and the tech-flavored trade war between America and China have reminded politicians how vital microchips are to the modern economy and how overly dependent their supply is on a few giant corporations. Concerns over excessive industry concentration led trustbusters to challenge the $40 billion acquisition by US chip designer Nvidia of Britain’s Arm – successfully, if the news is to be believed. of this week that the agreement is abandoned.

But governments’ favorite way to deal with overdependence is to attract more chipmakers, mostly from East Asia, with subsidies. On Jan. 25, the US Commerce Department released a report to that effect, urging Congress to pass a bill, already approved by the Senate, that includes $52 billion in subsidies for chipmakers. Mark Liu, TSMC, was candid in 2020 when he said such grants were key to persuading his company to build a new factory in Arizona, one of the few outside Taiwan. Intel chose Ohio for its factories in part because of the incentives offered by the state. Pat Gelsinger, his boss, scoured wealthy places that made similar offers.

the EU is keen to match the Americans, potentially putting itself on the hook for tens of billions of dollars. It aspires to double Europe’s share of chip manufacturing, currently around 10%. In May, the South Korean government hinted at a nationwide mission to provide $450 billion in capital spending over ten years to protect and develop its domestic industry. In November, Japan unveiled its own program, with TSMC expected to get some $3.5 billion. China has long harbored ambitions – bolstered by US sanctions but so far unsuccessful – to build a full-fledged chip industry.

Adding taxpayer money to chipmakers’ already rich spending plans could cause them to create even more excess capacity than usual, Penn said. This should give politicians and chip CEOs pause. The larger the boom, the deeper the subsequent bust.

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This article appeared in the Business section of the print edition under the headline “Party on”

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