Shortage
10% of the global semiconductors demand comes from the automotive industry. The onset of the current chip shortage lies in covid-induced global shutdowns. The shutdown led to a drastic reduction in global demand for semiconductors. But rather unanticipated, demand for chips recovered in Q3/20 as consumers increased their use and purchase of electronics, especially portable ones. The V-shape recovery in demand for chips then led fab companies to tailor design their facilities for the manufacturing of electronic device chips, thereby largely displacing manufacturing capacity for chips used in automotive, such as sensors, controls, power management, etc. This displacement created the most notable shortage of chips supply for automotive companies, but also for electronic device makers, including Apple and Samsung.
Exacerbating the issue is the secular growth in demand for computer chips due to innovative technology, growing need for AI, and the migration toward electrical vehicles. Whereas a traditional gasoline powered vehicle have 50 to 150 computer chips embedded, EV can use up to 3,000 semiconductor chips. At this point, the chip shortage looks to be not only cyclical but structural, as there are not enough fab-production capacity to meet the evolving demand.
In response to catching up to demand, fab companies such as TMSC and Intel have started contributing large sums of capex toward expansion and the construction of new plants. TMSC’s Arizona facility is slated to to begin volume production in 2024. Intel is also building a US$20 billion plant in Arizona, currently aimed to start production in 2024.
With the slate of new constructions not scheduled to be productive until at least late 2022 and the bulk of new capacity coming online in 2024, it looks likes the global semiconductors shortage is here to stay for at least another year or two.
Plant Expansions in the US
Intel’s $20 billion investment for the construction of fabrication plants in Arizona are two plants dubbed Fab 52 and Fab 62. The additions of these two new plants will bring the total number intel factories in Arizona’s Chandler camp to 6. A departure from other Intel plants, the two new plants will also hold production capacity for outside customers, though Intel has not yet noted how much capacity would this amount to. Intel also said it will open up another camp site for 2 additional plants.
TSMC has also purchased lands to to its first US camp in Phoenix, where the company plans up to 6 chip factories….
Outlook
A few years ago, during the upheavals under the Trump administration, I predicted that politics will become increasingly, blatantly intertwined with business. The things that’ve since transpired indicate that this prediction has come true. The near future won’t be so different…
I’d be worried if I were TSMC… it’s a company based on an island geopolitically stuck between a rock and hard place… The West doesn’t really care for it other than recognizing its strategic value in stymying the growing dominance of China on the global stage. Taiwan is not so much an ally as it is a chess piece that the West is increasingly viewed as having lost to China in a tussle for geopolitical territory… So what happens when a Taiwan semiconductor company wants to build plants in the US?! Next to the plants built by American darling Intel in the hopes of reclaiming US’s global chip dominance!? Would the two companies be treated with economic impartiality?! Or would there be subtle favoritism that lean toward Intel? I believe in the latter. And it wouldn’t be so strange…
Just as Western companies often do in Asia, Eastern companies also have problem operating in the West because of cultural and value gaps… This further lends to my outlook that executions will be more successful by Intel than by TSMC. INTC growing on home-turf, in an initiative that fits the political agenda of our time, will see much better success… The CEO of INTC Pat Gelsinger also comes from an engineering background… taking Intel back to its technical roots from Bob Swan’s overly financialized approach, which has evidently botched Intel for the past 2 years that Swan became CEO…
Intel is trading at less than 10x PE… And this pivot toward a more vertically integrated Intel, also involved in chip fabrication will likely be an inflection point for the company…. I’d long Intel….
