Semiconductors are simple devices, but they are the backbone of everything we do in the modern world. They enable communications, computing, health care, military systems, transportation, clean energy, and countless other applications.
And they do it all through turning an electric current off and on. If the current is on, it counts as a 1. If the current is off, it counts as a 0. Computer code runs off of billions of alternating 0’s and 1’s.
Since semiconductors were invented, the quest has always been for smaller, faster, and cheaper chips. Technology on the cutting edge has the highest margins.
But what you may not know is that most chips sold are on the trailing edge. We are talking about old 200 millimeter chips that are built in 20-year-old fabs. There are hundreds of such fabs that make chips for consumers who are looking for reliable and cheap technology.
The car industry doesn’t care how many nanoseconds it takes to switch on your air conditioner or how many millimeters the chip takes up in the dashboard. It just wants the chips to work and have a low input cost.
No Chips for You
It is the 200 mm chip that is in short supply.
Two years ago when the pandemic set in, chip buyers panicked and cut orders. In turn, fabs cut production. When work-from-home caused an unexpected surge in chip demand, buyers not only made up for past orders but ordered twice as much so as to build a stockpile for the future.
They didn’t want to be caught flat-footed again. Furthermore, this is in a backdrop where all chip demand is expanding due to natural technological growth in electronics.
If that weren’t bad enough, trailing-edge chips have low margins and legacy production machinery. In most cases, the machines to build these chips are no longer being built. Most new fabs repurpose old production machines. Naturally, there is a shortage of the very machines needed to build out new chips.
The market is used to paying a low price for legacy chips. But now there is an 18-month wait and it will have to pay up. Companies like Taiwan Semiconductor are spending $100 billion over the next three years to build new fabs to meet demand. They are also raising prices.
Chips are also extremely important for national defense. The military is …….