Chip companies just had their best year ever!
By JIYOUNG SOHN MEGHAN BOBROWSKY
Chip companies just had their best sales year ever – charged by a global semiconductor shortage and growing demand – and industry executives expect that total to double in less than a decade to more than $US1 trillion ($1.4 trillion).
The industry’s collective annual sales topped $US500bn for the first time in 2021, slightly larger than the global smartphone industry by some calculations. The pandemic accelerated digitisation trends, such as people streaming movies and video games and companies adopting all sorts of digital tools – all requiring chips.
The industry’s struggles to meet the appetite for its products caused a supply crunch that prompted national reckonings over chip production, unlocking government subsidies and a historic wave of investment. In an industry known for having boomand-bust cycles, it has triggered a race to expand.
“It took 50 years to become a half-a-trillion-dollar industry. It’ll take just eight to 10 years to reach a trillion dollars,” said Tom Caulfield, chief executive of Global- Foundries, one of the world’s largest contract chip makers.
Global chip sales rose 25 per cent in 2021 from the prior year to a record $US583.5bn, according to research firm Gartner. Factories working round the clock couldn’t keep up with demand. Prolonged shortages are projected to boost the semiconductor industry’s revenue by 9 per cent this year, outpacing the historic average rate of growth.
Last week, Samsung Electronics expressed confidence the good times would continue for its memory chip business, assuming component shortages and supply chain challenges didn’t get in the way. Intel CEO Pat Gelsinger, after the company reported record sales for last year, said: “2022 will only be better.” The semiconductor industry’s past is concerning to some analysts. It has a history of big upturns and reversals because customers sometimes over-order and then pause buying, leading to an oversupply of chips. Potential overcapacity, as well as supply chain disruptions and wider global economic risks, could spell turbulence ahead.
The semiconductor industry’s projections for explosive growth reflect the expectation of rising volumes and higher pricing. Computers, smartphones, data centres and cars will continue gobbling up semiconductors, while a wider range of products will need chips.
The chip shortage also has fostered closer links between buyers and sellers, reducing the risk of wild demand swings.
Much of the sales growth would be driven by pricier, highend chips, powering technologies like machine learning and highperformance computing, Bain & Co partner Peter Hanbury said.
The Biden administration last week warned US manufacturers were down to five days of inventory for key chips, compared with a 40-day supply a few years ago.
Average wait times for semiconductors globally now stretch beyond 25 weeks, well above what is considered a healthy range of 10 to 14 weeks.
In a sign that supply remains tight, the price of silicon wafers – on which semiconductors are produced – sold by contract chip manufacturers was expected to rise by 5 to 15 per cent, depending on chip type, said Dale Gai, a Taiwan-based research director for semiconductors at Counterpoint Research.
The investments that chip makers have made to increase production capacity won’t materialise quickly, keeping supply limited.
But as new chip factories come online, the industry could risk having overproduction by 2025, according to Bain.
The semiconductor industry was projected to log $US692.5bn in sales by 2025, and up to $US1 trillion by 2030 in the best-case demand scenario, said Andrew Norwood, research vice president at Gartner. That would top the size of the global fast-food industry today.
For now, chip makers are busy adding equipment to boost output, according to ASML, the Dutch provider of advanced chipmaking machines that can cost more than $US300m apiece.
Customers were opting for rapid shipments, forgoing some equipment testing typically conducted at ASML’s facilities before machines are shipped, CEO Peter Wennink said. Demand was 40 per cent higher than what the company could produce, he said, and it was going to stay that way for a while.
Chip-industry optimism drove record levels of capital expenditures in 2021 of at least $US146bn.
That is more than double the industry spending five years prior.
The US government has been trying to encourage domestic chip investments, after seeing production shift to Asia. Over several decades, the US went from making 37 per cent of the world’s semiconductors to 12 per cent, according to the Semiconductor Industry Association, a trade group.
Intel recently announced plans to build a chip facility in Ohio that could eventually expand to eight factories and cost around $US100bn. The company already had pledged mega-investments to expand in Arizona, New Mexico and Europe.
Rival chip makers are similarly investing massively. Taiwan Semiconductor has prepared up to $US44bn in capital expenditure this year alone. It is building plants in Arizona and Japan.