ChainMail | Chip Chip Hooray

Why the semiconductor market will outgrow volatility

ChainMail | Chip Chip Hooray

You can’t read about growth prospects for the computer business without seeing some version of this hackneyed phrase: “The semiconductor industry is notoriously cyclical.” 

Google that assertion and see how The Economist, Investor’s Business Daily, Seeking Alpha, Forbes, and the U.S.-Taiwan Business Council, among many others, have stated the obvious about the boom-and-bust business of chip production. I want to call it The Law of More (Then Less), in appreciation of the better known Moore’s Law of computing, which says the number of transistors on a microchip doubles every two years.

The semiconductor cycle, notorious or not, has seemed especially dramatic through the pandemic, when demand for chip-laden products skyrocketed. Just months ago, Ford was cutting back production of trucks because it couldn’t secure enough semiconductors. Now chip companies are reporting big sales declines. Worldwide semiconductor sales fell 3% in the third quarter from the year-prior period, and 6.3% from the second quarter, the Semiconductor Industry Association said.

“It’s an un­prece­dented change over a short pe­riod of time,” Qualcomm’s CFO declared. The Economist explained it this way, cliché included: “The industry is notoriously cyclical: new capacity takes a few years to build, by which time the demand may no longer be white-hot. In America this cycle is now being turbocharged by the government. The CHIPS act, which became law in August to cheers from chip bosses, is stimulating the supply side of the semiconductor business just as the Biden administration is stepping up efforts to stop American-made chips and chipmaking equipment from going to China, dampening demand for American products in the world’s biggest semiconductor market.”

That’s all true. To a point. Washington has agreed to invest $39 billion in domestic chip production to lessen dependence on China. Tai­wan Semi­con­duc­tor Man­u­fac­tur­ing Co., the world’s largest con­tract chipmaker, is planning to build a second multibillion-dollar chip factory in Arizona. Intel is building a plant in Ohio, while at the same time cutting its workforce in response to the post-pandemic drop in computer sales. Wow, talk about cyclical. 

But here’s the thing: The semiconductor industry isn’t static (See: Moore’s Law), and everyday life continues to deepen dependence on chips. Electric vehicles need semiconductors. AI needs semiconductors. Smartphones need them and so will your smart fridge. “De­spite the near-term in­dus­try gloom, chip ex­ec­u­tives still ex­pect global sales to about dou­ble to over $1 tril­lion a year in the next decade, un­der­pin­ning huge in­vestments in man­u­fac­tur­ing ca­pac­ity,” The Wall Street Journal said.

As I was contemplating the sunsetting of the Law of More (Then Less), I read a piece by George Calhoun, a professor at Stevens Institute of Technology, who also posited an end to the notorious chip cycle:

“Today, the semiconductor industry has become a supplier to manufacturers of just about every conceivable kind of consumer product, from kitchen appliances and automobiles, to smartphones and home security systems. The industry’s customer base has diversified enormously. It is no longer simply driven by PCs and servers. The market for chips has expanded by an order of magnitude (as the engineers say) and then some. It has also deepened, and by the laws of scale and diversity, the volatility of demand will inexorably decline.” Notorious doesn’t mean permanent.

Read the complete Issue 24 of ChainMail here.

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