Chip, what happens to Tsmc, Samsung and Intel
Total self-sufficiency may not be the ultimate goal of the US government. Global production of less advanced chips will likely remain concentrated in Asia. The analysis of Shailesh Jaitly, Investment Analyst of Capital Group
Things can change very quickly: there was a significant shortage of semiconductors at the start of the pandemic, while now, in some parts of the supply chain, the sector is grappling with oversupply. This situation has led to a sell-off in semiconductor stocks and has raised some questions about the extent and duration of this decline. A first question is whether the current downturn is different from previous semiconductor cycles. Each cycle is different from the next and it is difficult to estimate the duration and severity of a collapse. However, it would be a mistake to compare this period to previous downturns. During 2000-2010, most of the declines in the semiconductor industry were related to supply imbalances that typically took some time to resolve. Several foundries competed with each other, sometimes even with their own customers, and memory companies in Taiwan and Japan aspired to gain market share. The semiconductor equipment market was also fragmented.
TSMC, SAMSUNG AND INTEL CONTROL GLOBAL CHIP PRODUCTION
Today, however, the sector is more established and demand is more sustained, as semiconductors have proliferated within the applications we use every day. Three companies control the global production of cutting-edge chips: TSMC (Taiwan Semiconductor Manufacturing), Samsung Electronics and Intel . In addition, the market share of the top five equipment manufacturers has risen to about 75% from 40% in the early 2000s.
THE CURRENT REDUCTION IS MANAGEABLE
The current downturn is significant, but we believe it is manageable. The slowdown began to show in the second quarter of this year, when declining demand for consumer electronics, personal computers and smartphones led to a surge in chip inventories. We believe the industry has acted steadfastly: cuts have been made to capital spending plans and efforts have been made to contain spending.
MINIMAL RISK OF ACCUMULATING EXCESS STOCK OF ADVANCED CHIPS
Overall, we think stocks of logic semiconductors, which make up the brains of electronic devices, likely peaked in the third quarter, while stocks of memory chips, which enable data to be stored, are still rising and could reach peaking in mid-2023. Analog chips (used in circuits to control signals transmitted to logic chips) will likely be slower to recover, given the longer product obsolescence cycle and relatively stable prices. The risk of overstocking more advanced chips is less, because the threat of product obsolescence limits stockpiling behavior by distributors and manufacturers.
TAIWAN DOMINATES GLOBAL SEMICONDUCTOR MANUFACTURING
Secondly, an important point concerns self-sufficiency. After two decades of consolidation, Taiwan dominates global manufacturing of both cutting-edge and less-advanced semiconductors. Together with China, Taiwan also controls most of the market for chip assembly and testing and many other parts of the value chain. This has caused much concern among investors and governments of developed Western countries, especially following the escalation of geopolitical tensions between the United States and China and speculation about China's desire to reunite Taiwan with the mainland. The challenge is that, when it comes to cutting-edge semiconductors, many companies have a clear path to Taiwan.
TSMC WORLD LEADER
TSMC works with more than 500 customers worldwide and is the world's leading manufacturer of chips at the most advanced process nodes. The company reportedly plans to build a second manufacturing facility in Arizona to make more advanced 3-nanometer (nm) chips. Production is scheduled for the second half of 2025, almost a year after the start of the 5nm production in the first plant located in the same place. TSMC has stated that over the next few years, more than 20% of its production will be made outside of Taiwan, which may not seem like much. However, that would be nearly half of its entire production of cutting-edge chips. We believe these plants in Arizona will be sufficient to support the entire US defense semiconductor manufacturing and other critical demands for state-of-the-art chips. Production of more mature chips is concentrated in Taiwan and China. Taiwan and China are also leaders in terms of assembly and testing.
THIS IS WHY THE PRICES WILL INCREASE
The CHIPS and Science Act of 2022, which provides $52.7 billion for American semiconductor development, and a new fund set up in Europe aim to move manufacturing to these developed markets. There is no doubt that this will drive up prices. According to estimates, processor production in the United States could cost 30% to 40% more than in Taiwan and 15% to 20% more than in South Korea, where most of the current capacity is located.
THE TSMC APPROACH
We believe TSMC will likely move to a pricing model that charges a mixed average rate, regardless of where chips are manufactured. This approach has the potential to sustain higher chip prices for some time, reversing the trend of steady price declines that we have observed in the past. In 2023, TSMC plans to raise prices by 6% for all of its customers in order to reduce the costs of its overseas expansion into the United States, Japan and China, which will itself be inflationary. Second, reconfiguring the semiconductor supply chain will be a challenge. High production costs and the specialized skills required are major hurdles that the industry and policymakers must overcome.
THERE WILL NOT BE A COMPLETE DECOUPLING OF THE GLOBAL SUPPLY CHAIN
We also don't expect a complete decoupling of the global semiconductor supply chain. A large capital injection does not guarantee the success or self-sufficiency of a country operating in the semiconductor sector. China is a good example of this, having reportedly spent $100 billion building its own domestic chip industry. Furthermore, the complexity of manufacturing and designing cutting-edge semiconductors has grown exponentially and requires not only the best and brightest talents, but also materials and physical tools from different countries.
Ultimately, despite the sharp sell-off in semiconductor stocks, we believe semiconductor stocks remain a secular growth sector. Indeed, they are fundamental in terms of security, energy and overall productivity for economies around the world.
THE INDUSTRY WILL GROW DRIVEN BY THE DEMAND FOR HPC CHIPS
Demand for high-performance computing (HPC) chips used in cloud computing and artificial intelligence (AI) functions is a potential driver of further industry growth, while increasing silicon wafer sizes or growth of units represent a significant trend in machine learning and AI. Electric vehicles contain twice as much silicon as conventional cars, and 5G phones use around 40% more processors than 4G phones. In addition, the demand for virtual reality and augmented reality products is growing. Therefore, we believe the sector is well positioned to benefit from these positive factors in the years to come.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/innovazione/chip-che-cosa-succede-a-tsmc-samsung-e-intel/ on Sun, 05 Mar 2023 06:54:00 +0000.