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When the chips are down: What next for the semiconductor industry?

By Jenny McCall

10:48, 16 February 2022

A picture of a Semiconductor shortage headlines
Semiconductor shortages have hit many industries – can the sector rise to the challenge? – Photo: Shutterstock

A takeover bid of Israeli company Tower Semiconductors by Intel for $5.4bn saw Tower’s stock price surge yesterday (Tuesday 15 February).

"Intel has been out of favour for years now. But CEO Pat Gelsinger, who replaced Bob Swan last year, appears to be shaking things up," David Morrison, Senior Market Analyst at Trade Nation told Capital.com.

"Intel is one of the few US chip companies to continue to have manufacturing capabilities. Last year it announced further investment in factories in Arizona, New Mexico and Ohio. It has set up a specific division (Intel Foundry Services) to concentrate on this. Now it is investing further in its purchase of Tower. The latter manufactures old-style analog chips. They aren’t cutting-edge or sexy, and they’re very low margin," Morrison said. 

"But they play a vital role in auto manufacturing, phones, medical devices and industry, as they are used for battery management amongst other things. So the deal makes sense. It widens Intel’s product line, it brings manufacturing home to some extent and it boosts the company’s potential. For Tower, the investment from Intel will allow it to dramatically increase production.,"Morrison concluded. 

There has been a shortage of semiconductors since 2020 that has had a knock-on effect on the automobile and technology industries, as both use semiconductors to manufacture their products.

On Monday (14 February), the Semiconductor Industry Association (SIA) announced that global sales for the semiconductor industry totalled more than $555bn last year.

The SIA said this was the “highest ever annual total” and represented a 26% increase on the previous year. So, despite the global shortage – a result of the world opening up for business after Covid – the industry has managed to up its game.

Intel CEO Pat Gelsinger said the acquisition of Tower would “enable Intel to offer a compelling breadth of differentiated speciality technologies… unlocking new opportunities for existing and future customers in an era of unprecedented demand for semiconductors”.

“In 2021, amid the ongoing global chip shortage, semiconductor companies substantially ramped up production to unprecedented levels to address persistently high demand, resulting in record chip sales and units shipped,” said John Neuffer, Semiconductor Industry Association president and CEO.

Car makers such as General Motors (GM) have placed bets on how soon they see the semiconductor shortage ending. According to General Motors, the semiconductor shortage will ease in the second half of 2022. In a letter to shareholders, GM’s CEO Mary Barra said:

“With an improving outlook for semiconductors in the US and China, we expect our 2022 results will remain strong. In fact, we expect our EBIT-adjusted earnings to remain at or near record levels in the range of $13bn to $15bn, all the while investing more year over year in our growth businesses like Cruise, BrightDrop and our rapidly accelerating portfolio of electric vehicles.”

But not everyone agrees the semiconductor shortage will be over so soon. Despite the record numbers that the industry had in 2021, is there a risk we could see further decline?

Tesla (TSLA) CEO Elon Musk said in an earnings call in January that he believed the shortage was a long-term issue. “I think there’s some degree of the toilet paper problem as well, where, you know, there was a toilet paper shortage during Covid… It’s just people panicked,” he said.

Other experts have shared a similar sentiment and believe that access to certain chips will still be tight in 2022.

Infineon, a German semiconductor manufacturer, announced last month that the supply and demand for mature chips, crucial elements for carmakers, would still be constrained.

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“Supply limitations are far from over and will persist well into 2022,” Infineon CEO Reinhard Ploss said during an investor call.

Reinhard Ploss, CEO of semiconductor maker Infineon, is sceptical that demand will be quickly sated this year – and he’s not the only one.

Pat Geisinger at Intel said on CNBC last year that he does not expect the shortage to end until 2023. “We're in the worst of it now, every quarter, next year we’ll get incrementally better, but they’re not going to have supply-demand balance until 2023,” he said.

"Most of the big US semiconductor giants design new cutting edge chips, which have big profit margins, but farm out fabrication to other companies. In the 1990s the US had 37% of the fabrication market. That is now down to 12%, with the majority (65%) of manufacture now in Taiwan with Taiwan Semiconductor Manufacturing Co. accounting for 55%," Morrison said.

"But the recent supply chain disruption thanks to the coronavirus pandemic has shown up the weakness in overseas fabrication. US car makers were forced to stop production last year due to the chip shortage, and Goldman Sachs said 169 industries were adversely affected," Morrison added.

Deloitte, the accounting, and consulting firm, is also expecting the dry spell to continue throughout this year and into 2023.

But it’s not all bad news. Some experts believe that if investors and traders are smart, they could still benefit from the semiconductor industry.

David Bartosiak, stock strategist and semiconductor expert for financial firm Zacks, has suggested ignoring the bigger chip makers and looking to the smaller ones.

“While Intel is facing shrinking earnings and sales, smaller niche chip companies have surged through the crunch,” Bartosiak said.

“One such chip maker is David to Intel’s Goliath. It’s less than 1/4th of 1% the size of the $200bn colossus,” Bartosiak added.

Bartosiak goes on to say that the chip company, which he didn’t name, is still in its infancy and growing at a rapid rate. “The story is in the charts. Over the past year, Intel’s stock chart has looked like a disturbing EKG [electrocardiogram],” Bartosiak said.

Bartosiak goes on to compare it to Intel’s stock price for 2021 and says it appears the smaller company is growing and undergoing a price surge.

Intel stock price for 2021Zacks
Stock price for small chip firm 2021Zacks

So it appears that within the cracks of the supply-chain shortage, there is still some hope. “Be alert for companies with cutting-edge technology that separates them from competitors,” Bartosiak added.

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