The semiconductor crisis: more than just an economic cycle

Many people misunderstand the semiconductor crisis, believing it to be a classic economic cycle. However, this is not the case, and even journalists who should be informed about such things have missed this crucial detail.

Atmosphere at The Economist and Sotheby's Present
The atmosphere at The Economist and Sotheby's was electric on January 21, 2010 as they presented "The Art Of Collecting Art" at Sotheby's in New York City. Some of the world's most renowned art collectors and experts were in attendance, and the event was a huge success. It was clear that collecting art is not only a passion for many people, but also a serious business.

The Economist's Rhetorical Style: Why it Works

There is no doubting the quirkiness of The Economist's style - it may be down to their Englishness (or Britishness), or it could be a result of the magazine's181-year history as a slightly upmarket publication with a focus on financial expertise. Whichever it is, it's certainly one of the things that makes The Economist unique.

The Economist is known for its even-handed approach to news reporting, but sometimes this can result in a muddled message. The magazine often presents a strong thesis ("on the one hand"), only to undermine it ("on the other hand") with counterarguments or alternative interpretations. This back-and-forth can be frustrating for readers, who may not be sure what the publication's overall take on a issue is supposed to be.

I think that this forced even-handedness is not always helpful. Sometimes, the "on the one hand" argument is clear enough, but the "other hand" – the counter-arguments – can seem superficial or contrived.

The semiconductor industry is cyclical, with periods of boom and bust.

I believe that certain topics are more conducive to this type of rhetoric. Perhaps it has to do with the nature of the topic itself, or maybe it has more to do with the way that people tend to approach these topics.

The semiconductor industry is highly cyclical, and this is widely known. However, what many people don't realize is that the industry is also subject to huge booms and busts on a more or less regular basis. This means that investing in semiconductors can be a risky proposition, but one that can pay off handsomely if timed correctly.

Semiconductor Cycles by VolumeChart by author
Semiconductor cycles by volume are notoriously difficult to predict, but the general trend seems to be that they follow a similar pattern to the business cycle.

It's no secret that prices are unstable right now. Price declines have been lagging behind volume declines for a while now, and the post-pandemic anomaly has only made things worse. Looking ahead, it's hard to say exactly how this will all play out.

Semiconductor cycles by PriceChart by author
The semiconductor industry is notoriously cyclical, with prices rising and falling in waves.

It's no wonder that semiconductor companies trade at a significant discount to more mundane businesses like consumer staples or retail. Even high-flying Nvidia trades at a 10% discount to Costco, a "mere retailer." Intel, for all its tech prowess and strategic importance, has a price-to-earnings ratio 65% lower than Kellogg, the cereal company. The instability of the revenue stream is a big reason why semiconductor companies are often valued less highly than other businesses. Their earnings can fluctuate wildly from one quarter to the next, making it difficult for investors to predict their future performance. Nevertheless, semiconductor companies are essential to the modern economy and their technologies are only becoming more important. They may not be the most stable businesses, but they are certainly worth keeping an eye on.

There are a few reasons why Kellogg and Costco are often cited as examples of stability in the face of industry change. For one, both companies have constructed very stable revenue streams that are easy to model and predict year after year. In contrast, the semiconductor industry does not have a stable revenue model, making it more difficult to forecast and plan for changes.

The semiconductor industry is notoriously cyclical, and it's always difficult to predict where it will be at any given point. However, the current situation seems to be ripe for expansion and prosperity. With strong demand and limited supply, chipmakers are in a strong position to continue growing their businesses.

The article discusses the possible implications of the American chip industry's meltdown. It is written in a bivalent or ambivalent style, which leaves the reader unsure of the overall message. However, the provocatively titled story does provide some food for thought.

  • The future of the semiconductor industry looks nightmarish. Micron, a maker of memory chips, reported a 20% fall in sales. AMD slashed its sales estimate by 16%. Intel plans to lay off thousands, following a string of poor results that are likely to continue when it presents its latest quarterly report on October 27th.
  • The result of the proposed changes to American industry could be disastrous for the country. Less global clout and too much capacity could lead to a shaky foundation on which to build America’s future. This could have major implications for the economy and the ability of the country to compete on the world stage.
  • The fashion industry is notoriously cyclical, with new styles and trends emerging every season. However, there are some timeless classics that always remain in style.

Three Easy Answers

It's easy to see why the Economist attributes the recent disvaluation of the Chinese currency to three all-too-easy analytical tropes. First, there's the country's large trade surplus, which gives it ample room to manipulate its currency.

1. The fear of enabling China has led to calls for a chip tech embargo. However, this may actually cause China to invest more in the sector and become a stronger competitor. In the long run, this could lead to China achieving tech leadership.

  • The technology embargo is a recipe for trouble. If America's policies speed up China's efforts to 'resolutely win the battle in key core technologies', as President Xi Jinping affirmed in a speech to the Communist Party congress on October 16th, they may give rise to powerful Chinese competitors. Enough to keep you awake in terror at night.
  • It is clear that the trade war between the United States and China is far from over. While the United States has placed restrictions on Chinese tech companies, China is working hard to create its own domestic champions that can compete with American companies. This tit-for-tat approach is likely to continue, with each side trying to outdo the other. In the end, it will be the consumers who suffer the most, as they will have to pay more for products and services.

The CHIPS Act is simply going to create a glut and a prolonged slump in the market, by unbalancing supply and demand. This will lead to higher prices and less competition, which is bad news for consumers.

  • The new chips act is causing problems for the semiconductor business by stimulating the supply side while the Biden administration is working to stop American-made chips and chipmaking equipment from going to China, which is dampening demand. This combination is creating a situation where there is too much supply and not enough demand, which is causing problems for the industry.

The 3rd fallacy is that standard cyclical pattern in the chip industry will persist, that it is structural and unfixable, a presently recurring "nightmare" driven by consumer whims and moods. This is not the case. The chip industry is highly volatile, and while consumer whims and moods may play a role in short-term fluctuations, they are not the primary drivers of the industry's overall health.

  • It is clear that the current economic slump is having a negative impact on the sales of consumer goods, including PCs and smartphones. Inflation is also a major concern for shoppers, who are increasingly reluctant to spend money on new gadgets. However, it is important to remember that economic slumps are typically cyclical, meaning that they will eventually come to an end.

The counterargument to inflation is that shoppers are buying fewer gadgets. However, this argument is weak and does not hold up to scrutiny.

When Is A Cycle Not A Cycle?

This is not true.

The China threat is an illusion. China is incapable of challenging for tech supremacy in chips any time soon, and perhaps never. This was explained in a recent interview with the Mercatus Institute of George Mason University.

The CHIPS Act could potentially have a small distortionary effect on the economy, but it is unlikely to have a major impact. The revenue cycle and the capital expenditure cycle do not always align, so the CHIPS Act may not have its full effect for several years.

The chip industry is in the midst of a major cycle shift, and this time it is different.

The vicious cycle of classical economics is driven by the so-called whiplash effect. When manufacturers are tightly coupled to narrow market segments, small changes in downstream demand for finished goods (in the consumer market) propagate back upstream into much bigger swings in demand for components. This can lead to significant disruptions in the supply chain, and ultimately result in higher prices for consumers.

  • The bullwhip effect can have a significant impact on businesses, amplifying demand variability and resulting in larger swings in inventory. This can be costly for businesses, particularly if they are not able to anticipate or respond to changes in consumer demand quickly.
The Bullwhip EffectWikipedia
The Bullwhip Effect is a phenomenon that occurs in supply chains when small changes in demand can lead to large swings in inventory.

It is clear that the current state of the economy is not sustainable. The pandemic has led to three unusual patterns that have put a strain on the system. The first is that people are buying less. The second is that businesses are closing. And the third is that the supply of goods is not meeting the demand. This has led to a bullwhip cycle in which businesses are forced to cut costs and lay off workers. The result is a vicious cycle that is difficult to break out of. It is clear that something needs to be done to break this cycle.

There is no need to panic about changes in consumer demand. The auto industry is a good example of a sector that has misjudged consumer demand in the past, but there is no need for other industries to follow suit.hoarding behaviors.

  • It looks like the panic buying during last year's chip shortage has led to many manufacturers having too much silicon on hand. This is especially apparent when looking at stock levels relative to sales for the period of April to June. While this may have been good for short-term results, it appears that it is now coming back to bite companies like Intel and Micron. Hopefully they can find a way to correct the situation and get back on track.

Looking ahead, it seems likely that the buy-ahead behaviors of locked-down, remote-working consumers will continue to have an impact on future revenues. In particular, we can expect that these behaviors will continue to draw future revenues forward into 2020 or 2021. This could have a significant impact on businesses, particularly those that are reliant on consumer spending.

  • It is clear that the covid-19 pandemic has had a major impact on the global economy, with businesses of all types having to adjust their plans and outlooks. For firms like Intel, which had been expecting steady growth in demand for personal computers over the next five years, the pandemic has forced a re-evaluation of their plans.

Looking at the current state of geopolitics, it is clear that there are many areas of tension and conflict around the world.

  • The semiconductor industry is booming, and China is at the forefront. China imported $400 billion worth of semiconductors in 2021, and Intel's Chinese sales made up $21 billion of its total revenues. Nvidia said that an earlier round of restrictions, which curbed sales of advanced data-centre chips to Chinese customers and to Russia after its invasion of Ukraine, would cost it $400 million in third-quarter sales. Despite these challenges, the semiconductor industry is booming and China is leading the way. With continued investment and innovation, China is poised to become the world's leading semiconductor power.

To repeat, the classic Cycle — in any cyclical industry – is driven by changes in end-user demand. In this case, it is important to note that the changes in demand are what drive the cycle, not the other way around.

I do not agree with this statement. I believe that what has happened here is exactly what was supposed to happen.

The chip cycle is driven by three factors: the diminishing valuations that the market is placing on chip manufacturers, the increased cost of production, and the continued consolidation of the industry. While these factors may seem negative, they actually present an opportunity for chip manufacturers to invest in new technologies and production processes that will enable them to remain competitive in the long run.

  • The current situation with bloated inventories is not sustainable in the long term. Eventually, demand will catch up with supply and prices will rise. This could lead to inflation and other economic problems.
  • The opposite of what typically drives consumer demand, reduced demand, is instead triggering accelerated purchases by consumers. This is an interesting development that bears watching to see how long it lasts and what its impacts may be.
  • As the world becomes increasingly interconnected, geopolitically-driven government policies that prohibit sales of advanced chips to China could have far-reaching consequences. Not only would this cut off a major market for chipmakers, it could also lead to a permanent reduction in revenue.

From Missiles to PCs to Everything - How Technology Has Changed Our Lives

The semiconductor market has undergone immense diversification in the last decade, making it a crucial strategic factor in the tech industry. This market provides a wide range of options for companies, making it a key player in the industry.

It is fascinating to learn that the origins of semiconductor technology were all military in nature. The book Chip War by Chris Miller provides a great overview of this vital modern technology. It is amazing to think that the same technology that was once used to decode signals from deep-space probes is now used in everyday consumer electronics.

The consumer application breakout for the chip industry was based on a limited selection of specialized consumer products, starting with Texas Instruments’ and Hewlett-Packards’ calculators, and evolving into the Personal Computer – which dominated the 1980’s and 1990’s. It was a large but narrow market, and small changes in the end user environment made and broke major semiconductor companies in the day. Looking forward, the chip industry is poised for another breakout, this time driven by the Internet of Things (IoT). The IoT is a much broader concept than the personal computer, encompassing everything from connected cars and homes to industrial applications and beyond. This time, the market is much bigger and the potential for growth is much greater.

The semiconductor industry is one of the most important industries in the world today. It is the backbone of many industries, including the consumer electronics industry. 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. The revenue stream will become more stable. And as the market recognizes this, the valuations on the sector will become more… like Kellogg, or Costco. The semiconductor industry is an essential part of the global economy and its importance will continue to grow in the years to come.