For the semiconductor industry, 2021 has been almost too good to be true with all historical records beaten in sales and capex. Sales rose 26% to an all-time high of USD 556 billion. Many analysts are questioning the sustainability of this growth, and a few are forecasting the beginning of the end with an expected cyclical peak due in 2023. Semiconductors are notoriously cyclicals with many booms followed by nasty busts. We generally hate the words: “this time is different” but we may have to use them under the current circumstances. Not only, cell phones, PCs are requiring more chips per unit but there are two new guests in the room: date centers and autos.

Electrical vehicles and, in the near future, autonomous driving are shaking up the former balance between supply and demand. The other shift is that historically, consumer is the main user of semi-conductor and accordingly the main drive behind market cyclicality. The role of corporate and government has risen and become a significant part of demand. On the supply side, huge capex announced by TSMC, Intel, Samsung Electronics are expected to lead a 15% yearly increase in capacity. This will be just enough to match future demand. More to the point, announcements are not enough. At the moment, we have a sprinkler watered situation: chip makers and semiconductor equipment manufacturers are themselves being hit by chip shortages and other supply bottlenecks. Covid is not helping but there are more structural factors at work.

In the words of Morris Chang Founder of TSMC (and a US citizen):

“If you want to re-establish a complete semiconductor supply chain in the U.S., you will not find it as a possible task. Even after you spend hundreds of billions of dollars, you will still find the supply chain to be incomplete, and you will find that it will be very high cost, much higher costs than what you currently have.”

Europe, a late comer, in the game, will find it difficult to build from scratch an integrated chip manufacturing platform. TSMC new advanced plant is already 3 to 6 months behind schedule due to labor shortages. Taiwan is experiencing a talent shortage for graduates in microelectronics. This is a serious problem: according to Tsai Ming-kai President of Media Tek, the world top mobile chip manufacturer: “The shortage of high-end chip talents will pose challenges to the overall development of the semiconductor industry for the future”.

In this environment, we reiterate our position that semiconductor growth is structural. Some of the current bottlenecks are expected to ease in summer. But industry insiders are not seeing any improvement between supply and demand before 2025. The auto industry has learnt its lessons and is moving from a just-in-time philosophy to a just-in-case. The ecological transition is simply impossible without chips. For those, willing to benefit from these trends, semiconductor equipment manufacturers are a good solution. Despite an expected growth rate of 15-20%, stocks like Applied Materials trade on very reasonable valuation. ASML trades at a deserved premium due to its monopolistic dominance of next-generation Extra Ultraviolet (EUV) steppers.  To conclude with Churchill words, this is not the beginning of the end and not even the end of the beginning.