SEMICON West 2023 Summary – No recovery in sight – Next Year?

-SEMICON well attended but bouncing along the biz bottom
-Recovery seems at least a year away with memory even more
-AI creates hope but not impactful- Disconnect tween stocks & reality
-AMAT me too platform- Back end benefits from chiplets

SEMICON busy but subdued

SEMICON is certainly back to pre-covid levels or perhaps better. The show has turned its focus primarily to smaller tool makers or sub suppliers with larger companies having no floor presence and only doing private meetings in hotels. In general the show is a bit sparse but still a great place to network.

The general tone was positive for the long term but subdued and negative for the near term as we continue to bounce along the bottom in the current down cycle with no particular detectable change in momentum over the last 6 months or more.

Recovery at least a year away, likely longer for memory

This down cycle feels a lot like the downturn of 2000 which was fairly long lived. We see a similar pattern of over capacity that was brought about by the YTK buildup and in the current case the post Covid build up.

As we have also seen in the past, so called industry analysts always seem to suggest the downturn will be short lived and we will see a recovery in 6 months. Then six months comes around with no recovery and they kick the can down the road for another six months, saying the recovery is just another 6 months away.

Our view from the beginning of this downturn is that this downturn is fundamentally different , more systemic and therefore longer. It appears we have been correct so far in our more pessimistic projections.

We are already over a year in the current downturn which makes it one of the longer down cycles, at least as compared to more recent cycles.

We think that given current macro economic outlook coupled with semiconductor industry demand/capacity balance that we are at least a year off from a recovery.

The recent down month for TSMC revenues is certainly not a very good trend.

Memory will certainly take longer to recover as the supply demand imbalance is far worse than foundry or logic.

HBM is only bright spot in memory but far from enough

High bandwidth memory is the only bright spot in an otherwise ugly supply/demand imbalance. HBM is being driven by the AI craze which is clearly fantastic but is way to small overall to make up for the vast majority of memory applications which remain very weak.

Memory makers will certainly do everything to reallocate production to HBM which could eventually swamp demand and reduce premium pricing but at the very least it will help the acceleration of AI which will be good for the rest of the chip industry.

Fab project delays likely to increase as downcycle stretches

In short cycles of the past, new fab projects continue without much delay as by the time the building shell is done the industry is already in a recovery and equipment move in coincides with an upturn which works out.

The combination of a longer downcycle and a more tepid recovery will likely delay the many anticipated fab projects. Even though it seems like we continue to hear new projects every week, its almost a certainty that not all of them will ever get built let alone built on time.

TSMC is clearly having issues in Arizona. Intel is at least a year and probably a lot more delayed in Ohio.

Yet we still hear of new projects in Europe, Israel, Japan etc;. What we could eventually see is that given the likely over supply, chip makers will pick and choose to continue fab projects in countries and areas that offer the best economics and delay/cancel those that are not as attractive

What will Intel choose when faced with its current excess capacity situation with fabs planned for Arizona, Ohio, Europe & Israel? There is no way that all are going to be built….especially on time….it would be throwing gasoline on an already raging bonfire.

Memory is in far worse oversupply, with excess inventory, reduced production and loss making pricing. Some memory makers , such as Micron , would have a hard time even affording a fab project until we are firmly into an upturn. For memory that could be into 2025 with Boise not starting to come on line until 2027 and beyond and Clay NY years behind that probably into 2030’s.

Delays will require re-work of CHIPS for America

We have previously said that the CHIPS Act needs a “re-work”. The downcycle clearly was just way unlucky timing but it means that many of these now delayed fab projects will fall well outside of the 5 year time window originally scoped out for CHIPS.

If you are Micron, you are likely past the intended CHIPS Act window with most projects.

Getting enough HR talent for the chip industry is obviously a larger problem than first thought. Materials such as rare earth elements that we have been warning about for several years are now turning into the problem we anticipated as they became a weapon.

We wonder when CHIPS act money will have to be re-allocated to insure supply of critical rare earth element refining capacity which is non existent in the US.

In short circumstances have radically changed since the CHIPS act was envisioned and we need to quickly adjust or risk wasting money and time.

We still don’t have any plans for back end and packaging as all the lime light has been focused on front end fabs.

No big announcements at SEMICON – Only a “me too” platform from AMAT

There were no significant technology announcements at SEMICON and the only product announcement was AMAT with a “platform” change that goes to a “linear” configuration rather than a circular configuration for tool chambers

This is pretty much a “me too” announcement that follows in the foot steps of Lam’s “Sense.I” platform, announced a long while ago, to reduce footprint by going both linear and vertical.

Many manufacturers have been down this road as a linear configuration allows higher density versus circular “”mainframe” based designs that were more about accommodating the wafer handling robots. AMEC in China has long had a linear design along with an ill fated etch tool from Intevac or the “slingshot” from Semitool over a decade ago…..nothing new here.

BESI back end beneficiary of 3D packaging

The one significant thing, which is not particularly new, is the increased focus on packaging due to “more than Moore”, Chiplets and 3D packaging etc;.

Die & wafer bonding, die stacking and attach, interposer technologies and all things related to packaging multiple die are clearly very hot and in great demand.

BESI, has been in the packaging business forever and has worked very hard in relative obscurity in the little recognized dark recesses of chip making that was previously taken for granted. Obscure no more….Now they are working with the likes of AMAT that want to focus on the newly important back end of the industry where BESI has great technology and a long rich history. It has ben 27 years since we worked on the IPO of a little Dutch company that is finally in the spotlight…….

Disconnect between semiconductor reality and stock prices continues

Semiconductor stocks remain hot for no good reason whatsoever. We poke to a number of industry executives who privately commented that the disconnect was crazy and were fearful of a correction.

While we certainly agree with all the hype of AI and perhaps even more so than some of the optimistic bull cases….we think AI could be way bigger than the internet.

The disconnect is that while this is all great for the semiconductor industry it is not the be all, end all, that is the sole driver of chips that many people assume. Much as with the internet revolution, the supporting semiconductor infrastructure is critical to its functioning but sooner or later becomes a bit more mundane as telecommunications devices have become over time.

The chip stocks are acting like AI is going to double chip demand and launch the industry out of its current downcycle neither of which will likely happen.

AI is great for chips but not the savior that a global macroeconomic recovery would be.

The stocks

While SEMICON West seems back to its old self, the performance of the industry is far from it yet the stocks are acting as if it were…..

What to do?

Buy into the thundering herd mentality or risk being left in the dust.

Perhaps the real answer is to be increasingly selective and not just buy into a random sampling of chip stocks.

Looking for laggards or beaten down names that have yet to recover and lightening up on those that have been overheated.

We would want to be more defensive, perhaps a bit more biased to the small cap side.

Right now, the tidal wave that is AI is raising every boat in chips to new heights but sooner or later investors will be more selective.

Our concern is that as realization of a longer downturn comes about, investors patience may get tested and they may look for greener pastures while waiting on a recovery that is taking longer.

Time waits for no one.

Also Read:

SEMICON West 2023 Summary – No recovery in sight – Next Year?

Micron Mandarin Memory Machinations- CHIPS Act semiconductor equipment hypocrisy

AMAT- Trailing Edge & China Almost Offset Floundering Foundry & Missing Memory

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