Pollack: Chips ’n’ dip

The Monday Morning Quarterback
A quick analysis of important economic data released over the last week

By Elliot D. Pollack & Co. | Rose Law Group Reporter

Instead of our weekly data overview (which we’ll pick back up next week), we wanted to touch briefly on semiconductors. Media reports have lately described how a shortage of semiconductors has resulted in the slowdown of auto production in the U.S. and across the globe. We’d like to discuss the history and critical nature of this important high-tech industry and the implications for Arizona.

The semiconductor shortage is considered cyclical but is more acute in a couple of industries like autos and PCs. The auto industry is a small part of the semiconductor industry, representing about 11% of demand. The auto industry was caught flat-footed after canceling orders during the initial months of the pandemic. But at the same time, the world went virtual, and orders increased for personal computers, video games, home appliances, and cloud-based applications. Communications and PCs each account for 1/3rd of semiconductor demand.

Also on the demand side, the transition to 5G technologies, artificial intelligence, and cloud-based solutions has further exacerbated the semiconductor shortage. However, once the industry catches up to demand, it will benefit from these powerful tailwinds.

Semiconductors are also a strategic priority from a national security standpoint. Over the years, the U.S. has ceded leadership in manufacturing to Taiwan. U.S. market share for chip manufacturing is 12% today, down from 37% in 1990. China, on the other hand, wants to reduce its dependence on U.S. semiconductors and has defined chip manufacturing as a strategic imperative. As it devotes its resources to chips, it will develop some capabilities like it has in other industries.

A massive semiconductor spending cycle is underway to meet new demand and navigate geopolitical tensions. The U.S. and Europe are both seeking to bring critical supply chains closer to home given that Taiwan controls the majority of the high-end manufacturing production of semiconductors. Taiwan Semiconductor Manufacturing Company (TSMC) which is planning a manufacturing facility in north Phoenix, holds about an 80% market share for leading-edge chip production with clients such as Apple, Qualcomm, and Broadcom.

There has also been significant consolidation in the industry with only three dominant players, TSMC, Samsung, and Intel, capable of manufacturing the smallest chips. So, the very fact that TSMC is coming to Arizona, Intel is expanding its Chandler footprint, and Samsung has Arizona on its short list for a future chip facility, gives you some idea that we are in the center of one of the most important industries of the future.

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