-Chips enable tech sector which underpins entire economy
-Is the US chip sector “Too Big To Fail”?
-If US chip industry fails, does tech & everything else follow?
-How chip/Taiwan crisis compares to 2008 financial meltdown
It was the best of times, it was the worst of times
We find it an incredible juxtaposition that we are experiencing the greatest strength and growth that the semiconductor industry has ever seen yet the threat to the largest participants and the world order of the semiconductor industry is nothing less than existential.
Semiconductor demand and strength is off the charts yet Taiwan/TSMC is literally under the gun and Intel needs a string of “Hail Mary” plays to get back in the technology race which defines success in the industry.
Things could look incredibly different in a short period of time. We are on the precipice of potential extreme change.
We may have seen a similar movie before in the overheated financial sector that led up to the 2008 financial crisis that could have had a cataclysmic ending if it were not for some strong, last ditch intervention. This is not to suggest that the sub prime mortgage industry and current chip demand are similar, one was almost fraudulent and the other is real demand. The only parallel we draw is that strong intervention may be needed to avert a potentially much larger problem. The risks that the semiconductor industry faces are both self inflicted as well as external.
Intervention may also take other forms than just pure financial assistance as these risks are varied.
Is the US semiconductor industry Too Big To Fail?
What could happen if Intel fails to get back into the technology race? What if TSMC remains the only leading edge foundry for fabless US chip companies such as Nvidia, Qualcomm and AMD? Can Micron keep up in the memory industry in the face of a torrent of spending in Asia?
Obviously hundreds of billions of dollars of semiconductor revenue are at risk for US based companies but perhaps much more importantly trillions of dollars of goods that rely on the semiconductor industry for the very heart of their products. From the auto industry to defense to communications, the cloud, mobile phones and well beyond.
Cutting out the heart of the stock market and years of a rally
Lets just think about what the stock market would have looked like and what it would look like in the future without the semiconductor industry. as it is today.
In case you have been living under a rock with your money stuffed in a mattress, the main driver of the stock market has been tech stocks. Yes, other sectors have done well but tech, and especially semiconductors, has been at the heart of strength in the market and creating much of the momentum.
The stock market and with it, many investors net worth would look a lot different.
Semiconductors are inside and critical to so many industries it somewhat reminds us of how AIG was ingrained in the very fabric of the financial industry in many products and companies that people did not understand until the risk of their failure exposed just how deeply they were ingrained. But it took a $180B government bailout to rescue AIG from taking the whole financial sector down with it.
The chip shortage that has stopped cars from shipping is just the beginning and tip of the iceberg that goes much further and deeper into the economy with much greater risk.
So the question is would the failure of the US semiconductor industry do less or more damage to the US economy than if AIG had failed? Maybe its also worth a $180B investment and not just a small $52B Chips for America, which is a relative drop in the bucket.
Maybe its not just Too Big to Fail but perhaps Too Critical to Fail as well…..
The risks are both internal and external
Given the international nature of the semiconductor industry and the US’s reliance on Taiwan and Korea the risk profile is much more complex and less controllable as it is not contained within our borders or jurisdiction.
The risks are also less measurable and more subject to “Black Swan” events that are not well defined nor easy to protect against.
President Xi gets impatient in his quest to reunite Taiwan with the mainland and is further aggravated by the US denying him semiconductor technology. He decides that if he can’t have Taiwan and its chips that the US can’t have it either and launches one conventional low yield missile into TSMC’s leading fab that produces chips for Apple, Intel, AMD, Nvidia and Qualcomm etc… putting it out of commission.
Very few people would die or be injured, it would not start a war, but the stock market would implode and the US tech industry would fall apart. A similar threat exists in Korea as Samsung fabs are within artillery, not even missile, range of Kim Jong Un who is clearly less stable.
These risks while low are more than zero
Internal threats are more similar to 2008’s financial crisis in that they were self inflicted, either not paying attention or failure to execute or similar. The semiconductor industry requires laser like focus, copious spending and a long term view that is measured in years and not quarterly results. Developing and maintaining the talent pool is a very long term effort that is key to the industry’s success.
Intervention & protection is both financial and systemic
The semiconductor industry needs both financial help, to build many new fabs in the US as well as the surrounding infrastructure needed but it also needs proper political and governmental support to foster the industry, protect it and incentivise it.
While the Chips for America act is a good start, it is only a down payment and without additional terms and guardrails it could potentially be much less effective.
Chips for America needs a parallel bill that sets up the proper environment and infrastructure to foster the industry in the US.
The financial bailout needs to come with clear terms and ownership positions to insure it is properly spent and taxpayers get a return on their investment much as what happened in the case of AIG.
There also needs to be some triage and prioritization of resources such that more critical companies in the semiconductor industry get more attention much as Lehman was not on the priority list while AIG was. We would suggest strong focus on leading edge and all the associated enablers…..
Don’t get fooled by the current good times
We also think that there may be some who question putting money and effort into an industry that is currently in “party mode” with their stocks at record highs in record time with more business and profits than they can handle.
This will not last forever. There could be a soft or hard landing but there will be a landing at some point. Supply almost always catches up with demand.
Part of the need for action is to protect the industry when things aren’t as good as they are now.
When the shortages are over the issues risk being forgotten
Only over the last year has the general public and the political public gotten a very small inkling of the semiconductor industry and only through secondary means such as the shortage of cars or other shortage related issues.
When the shortages are over, we risk being forgotten about again as the general public focuses on the new topic du jour.
Even though semiconductors are both ubiquitous, pervasive and critical they are none the less “invisible” in our daily lives and thus easily forgotten unless a problem happens.
Its hard to buy insurance or care about a potential problem you can’t even remember. The semiconductor industry spent many years in obscurity and could easily return.
While many of the risks and issues are low probability we would still pay attention to exposure that our portfolio would have to some of these events in the semiconductor industry that could snowball into much larger problems for tech and the general economy.
Many investors I speak to do not immediately grasp the direct connection between Taiwan/China and the greater tech industry and global economy. How some small events there could create larger ripples through other sectors.
This “Butterfly Effect” that the semiconductor industry has is not fully recognized nor understood. Investors would be well served to look at these interrelationships and dependencies. its not just autos.
Spending time and money to help the industry is cheap insurance relative to the percentage of the US and global economy impacted by semiconductors. Spending tens of billions to avert trillions of risk.
We would also try to predict which semiconductor related companies would benefit most and in what ways from potential assistance efforts….and just as importantly who would lose out or be negatively impacted from those efforts.
At the top of our list fo Too Big to Fail (or perhaps Too Critical to Fail) would certainly be Intel and Micron. All the equipment companies who hold the manufacturing know how, such as Applied Materials, KLAC, Lam, and foreigners such as ASML and TEL. EDA companies and some material companies. While these companies are certainly not at risk right now they are none the less critical to the industry and its health.
While TSMC and Samsung are certainly highly critical, they are most critical for their fabs to be built in the US that are within the safety of our borders as insurance for our tech and greater economy that currently rely on semiconductors from less stable regions.
The semiconductor industry is truly Too Big to Fail even though its products are too small to be seen and hidden in plain sight.