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In this video, we dive into the rollercoaster journey of semiconductor stocks, the global chip shortage, and the potential for an impending oversupply. With billions of dollars in subsidies pouring in from the US, Europe, and China, the semiconductor industry is booming, but at what cost?
We'll discuss:
The rise and fall of pandemic stocks and the impact on the semiconductor industry
The global chip shortage and its effect on various industries
How governments around the world are investing in semiconductor manufacturing
The race to build new semiconductor fabs and the potential consequences of overinvestment
Declining global PC demand and the looming threat of an oversupply of semiconductors
Are we heading for a semiconductor glut, and what does this mean for investors, governments, and the tech industry? Join us as we explore the potential risks and rewards of the current semiconductor boom.
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0:00 - 4:35 Intro
4:36 - 9:26 Reasons for CHIPS Act
9:27 - 12:46 Subsidies
12:47 Impending chip glut
#Wallstreetmillennial #semiconductor #intel

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Foreign, we've talked a lot about stocks experiencing a so-called pandemic round trip. Over the past three years, companies that benefited from work from home trends saw their revenue and share prices surge. But as the economy went back to normal in 2021 and 2022, these stocks came back down to earth, with many of them losing more than all their pandemic gains. But investors weren't the only ones who got carried away with the pandemic bubble.

During the height of the pandemic, demand for personal computers and video game consoles surged as people needed new devices to work and play from home. This caused a massive surge in demand for microchips, leading to a chip shortage impacting everything from personal computers to automobiles. Solving the chip shortage became a strategic imperative for many governments, with some even calling it a matter of National Security in the summer of 2022, U.S President Joe Biden signed the Chips Act, which provides 50 billion dollars in subsidies for domestic microchip manufacturing. This doesn't even include subsidies given by individual states which amount to tens of billions of dollars in their your own right.

Just a few months later, the European Union announced their own semiconductor subsidy program worth 47 billion dollars. Not to be outdone. China announced its own subsidy program worth 143 billion dollars. Semiconductor manufacturing companies were quick to take advantage of the generous tax breaks and subsidies of the Chips Act with Intel investing in a 20 billion dollar plant in Arizona and another 20 billion dollar plant in Ohio.

The Taiwan Semiconductor Manufacturing Company is building a 12 billion dollar plant in Arizona and Samsung is building a 17 billion dollar facility in Texas. As of December, 2022, semiconductor manufacturing companies have already announced over 200 billion dollars in new investments in the US. A similar amount of investment is expected to take place in Europe and even more in China. Semiconductor subsidies across the world are instigating hundreds of billions of dollars of new semiconductor fabrication plans or Fabs which will cause a tsunami of new Supply hitting the market in the coming years.

This new Supply couldn't come at a worse time. Global PC Demand peaked in 2011. as computers became more durable and have longer life spans, sales have been consistently declining. There was a huge boost during the pandemic, but as of the first quarter of 2023, demand has already fallen more than 40 from the pandemic highs.

We're already starting to see the effects of the semiconductor glut show up in the financials of publicly traded chip companies. Taiwan Semiconductor has seen its Revenue decline by 17 since the pandemic highs, Intel has seen its Revenue decline by 43 percent and Micron has seen its Revenue decline by a shocking 55 percent Taiwan Semiconductor is a contract manufacturer and its revenue is tied to long-term Supply contracts. That's why it's taken longer for the chip flood to hit them. Tanking chip prices have caused both Intel and Micron to switch from record profits to net losses.
In a matter of just a few quarters, Taiwan's semiconductor is still profitable thanks to its long-term Supply contracts. However, even they are starting to see prophecy. Road Usually when chip prices decline, producers scale down production to bring the market back to a profitable equilibrium. But this time is different.

Despite mounting losses, the chip makers are investing hundreds of billions of dollars in a new capacity thanks to government incentives. In this video, we'll look at the Global Semiconductor Subsidy arms race why this now looks like a massive waste of money, and how this could counter-intuitively make the microchip industry uninvestable for the foreseeable future. During earnings season is vital to keep track of which companies are reporting earnings when so you can set yourself up to find opportunities. For example, if a company on your watch list has an earnings miss that could create a buying opportunity and vice versa.

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Foreign. The semiconductor shortage of 2020 and 2021 clearly had a negative impact on the US economy. With many automobile factories forced to Halt production due to a lack of access to microchips. a surge in demand for personal computers and other electronic devices caused semiconductor manufacturers to shift production away from the less sophisticated and less expensive chips used in automobiles.

Also, in the beginning of the pandemic, automobile manufacturers decreased orders for chips on the assumption that the demand would crater. However, government stimulus cause automobile demand to rebound far faster than expected and the automakers didn't have the chips on hand to fulfill these orders. Intel Estimated that the chip shortage cost the U.S economy 240 billion dollars of lost output in 2021. With Intel being among the biggest potential beneficiaries of the U.S Chips Act, they clearly have an incentive to exaggerate the cost of the chip shortage as much as possible, but nevertheless, the chip shortage undoubtedly had a negative effect on the economy.
Solving the chip shortage was a key justification for the 50 million dollar Chips act. For example, U.S Commerce Secretary Gina Raimondo said quote last year because Ford didn't have access to enough chips, even for simple things like windshield wipers. Their workers in places like Michigan and Indiana only worked a full week three times in the year. Unquote.

The problem is that large semiconductor Fabs take at least three years to construct, so the new Investments spurred by the Chips act won't result in any new capacity until at least 2024. But as of the Spring of 2023, the chip shortage has already ended. The crash in demand for personal computers has freed up space at Fafs to start producing the less Advanced chips using automobiles. According to JP Morgan we're nearing the end of the supply crunch.

In looking ahead, they don't see any other major constraints, so Natural Market forces have already solved the chip shortage before any of the new capacity has come online. Another rationale for the chip sack is that it will create jobs and Revitalize the US economy by making America once again the leader in semiconductor. Manufacturing what would become the semiconductor industry first started in 1947 when Bell Labs a subsidiary of Atnt, created the first transistor. Throughout the 1950s, 60s, and 70s, substantially all semiconductors were designed and manufactured by U.S companies within the U.S Semiconductor manufacturing is a labor-intensive process, requiring large numbers of skilled technicians.

In America, these skilled workers commanded very high wages, which in turn made the semiconductors themselves very expensive. Around the 1970s, the Japanese government realized that this could become an opportunity. Japanese Workers had far lower wages than their American counterparts at the time. If Japan could set up its own semiconductor manufacturing industry, the low labor costs would provide a competitive advantage over the U.S So the government gave large subsidies to existing technology companies like Toshiba so that they could make the investments into Capital Equipment and other necessary infrastructure.

By the 1980s, this plan bore through in Japan Star are taking significant market share from U.S Manufacturers In the 1980s, wages in South, Korea and Taiwan were even lower than those in Japan. They followed a similar strategy of subsidizing semiconductor manufacturers and ended up taking market share away from Japan. By the 2000s, the majority of semiconductor manufacturing was happening in East. Asia.

A lot of testing and packaging of semiconductors, which requires less skilled labor than the actual manufacturing is done in places like Malaysia and Indonesia where wages are even cheaper. The reason the US does not manufacture semiconductors anymore is the same reason it doesn't manufacture clothing or assemble cell phones. The labor-intensive nature makes it far cheaper to do overseas. That's not to say that the US doesn't still play an important role in the semiconductor industry.
Many American Semiconductor companies follow a fabulous model whereby they design chips and then pay a contract manufacturer like Samsung or Taiwan Semiconductor to manufacture them. This is exactly what you would expect to happen in a free trade environment. The US which has far higher wages, focuses on semiconductor design which requires a smaller number of Highly skilled and educated researchers Asian Countries with lower wages focus on manufacturing which requires a much larger number of relatively less skilled technicians and you can see this in the relative performance of the large U.S Semiconductor companies AMD Nvidia and Qualcomm are fabulous companies. They only design chips and Outsource manufacturing to Asian manufacturers Intel manufactures its own chips.

Intel has been unable to effectively compete with Taiwan semiconductor or Samsung and their share price has been cut in half over the past five years. Its fabulous peers have all more than doubled in value. These Natural Market forces created the semiconductor industry that we have today, which can build massive qualities of electronic devices for very cheap prices with high labor costs, making the U.S uncompetitive. The only way to build up the domestic semiconductor manufacturing industry is with subsidies, and this is not the first time the US has tried to onshore manufacturing with government intervention In 2009.

then President Barack Obama signed the Energy and Recovery Act which allocated billions of dollars of subsidies to the U.S Solar panel manufacturing industry. One of the beneficiaries was a California-based company called Solyndra, which received over half a billion dollars in subsidized loans. Just two years later, the company went bankrupt and the government lost hundreds of millions of dollars and it wasn't just Solyndra many U.S solar panel manufacturers went bankrupt in the following years. The main problem was competition from China with abundant low-cost labor.

Chinese Manufacturers can produce solar panels in such large quantities and at such cheap prices that U.S companies have no realistic chance of competing. Obama's solar subsidies came at the worst possible time as China's solar industry was just getting ramped up. Prices started changing and the average cost of a solar panel today has fallen by more than 90 since the energy. and Recovery Act was signed today.

China represents 75 percent of global solar panel manufacturing, while the US represents less than three percent. While the solar subsidies might have been a waste of money, at least they temporarily created jobs in the U.S at a time when they are desperately needed. Today's environment is completely different, companies are facing labor shortages, and inflation is well above the Fed's target. The 50 billion dollars of semiconductor subsidies will just create jobs America does not need at a price they cannot afford.
The reason that South Korea and Japan subsidize their semiconductor manufacturing Industries in the 1970s through 90s was because at the time they were much poorer than the United States which was and still is the technological Leader By copying an American industry and doing it for cheaper, these countries were able to close the gap with the United States. While this did cause job losses in America in the long run, the Outsourcing of manufacturing to cheaper countries is a great thing for the U.S economy. Because other countries are willing and able to manufacture products like semiconductors at a cheaper price. this allows U.S workers to focus on new Industries where they have a competitive advantage and end up creating far more value.

That's why countries like China, South, Korea and Japan have never surpassed the US in terms of GDP per capita. Once labor becomes as expensive as in the U.S their competitive Advantage disappears. So industrial subsidies only make sense for a poor country that is trying to close the gap with the economic leader. Since the US is already the economic leader and already has higher average wage, industrial subsidies close the gap in the opposite direction.

Subsidizing an industry where the US has a competitive disadvantage crowds out resources from Industries where the US has a competitive advantage and will make the U.S poorer in the long run. Not only is the chips act misguided, it probably won't even work In response: Korea Japan The EU and China have all announced their own subsidies for Semiconductor manufacturing. So instead of turning the Us into a leader in ship manufacturing, all the subsidies will do is create a global race to the bottom where the U.S will not gain significant market share despite having wasted tens of billions of dollars. Thank you! The Covid Pandemic was a once in a hundred year event that chip makers had not planned for.

This caused a cyclical chip shortage with severe negative impact on the U.S Economy: The chips act as a structural solution to a cyclical problem. As of early 2023, the Natural Market forces have already solved the chip shortage Before the Chips Act has created a single new chip. We're already seeing prices of semiconductors crash, with both Intel and Micron reporting multi-billion dollar net losses in the first quarter of 2023. Fueled by government subsidies, Chip makers are planning to spend 500 billion dollars to open 84 new fabrication facilities over the next two years.
This tsunami of new Supply threatens to cause the mother of all chip Bloods which will make many of these new Fabs economically unviable. Many chip makers will directly benefit from the Chip Sack subsidies, but counter-intuitively the resulting chip GLA may make the entire sector uninvestable. Alright guys, that wraps it up for this video. What do you think about the Chips Act? Let us know in the comments section below.

As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.

By Stock Chat

where the coffee is hot and so is the chat

29 thoughts on “The great semiconductor glut: unintended consequences of govt. subsidies”
  1. Avataaar/Circle Created with python_avatars John Cavallo says:

    Not all chips are created equal. This video acts as though everything is fungible and is way too simplistic.

  2. Avataaar/Circle Created with python_avatars Spencer Howard says:

    Semiconductors have ALWAYS been boom and bust. These new Fabs arent online yet and aren't going to start producing in any volume for a few years at least. The shortages are a lot more complicated than people realised. Most of the shortages affecting appliances and cars came from other components like power stages and substrates.

    The issue with automotive is the hubris of automotive manufacturers. They were using very old dirt cheap nodes. When they cancelled orders many of these older fabs were shutdown to transition to newer more profitable and productive nodes and now automotive component suppliers are scrambling to change their designs for these newer nodes. As a result car making is still screwed. Interestingly Tesla uses much newer nodes for most of its semiconductors as do the newer chinese brands which is why they are less impacted.

    Intel is lagging behind AMD in terms of architecture for it's processor performance and behind TSMC Nodes and they have been steadily losing market share as a result.

    Demand has fallen for a number of reasons.
    In client a lot of consumers bought during the pandemic and probably won't upgrade their systems for a while. You also have ethereum switch to proof of stake which basically killed GPU minning which has resulted in a lot of relatively new ex minning GPUs flooding the market switch supresses demand for new GPUs. This current generation of GPUs is also pretty uncompelling for consumers as it represents a relatively small improvement in performance for most SKUs.

    Enterprise and hyperscalers which make up the majority of volume for chip makers like Intel AMD and Nvidia are reducing orders due to tighter monetary policy and uncertain economic conditions. Intel has been hurt the most by this as AMD continues to take market share from them.

    TSMC is having problems with their newest node iteration which apple was set to use first for their new iPhone and M chip as a result Apple isn't ordering as much as they otherwise would have and have changed their launches of new products.

    We are in the middle of the transition from DDR4 to DDR5 so demand for DDR4 is falling but DDR5 is not ramping up as fast due to slowdowns in procurement in the enterprise and client sales which is hurting micron and samsung as the biggest suppliers.

    Samsungs 5nm and 3nm nodes are not yielding well which also doesnt help them with mobile chip sales.

    In the short term things are messed up but by the time new capacity comes online it's likely that demand will have rebounded.

    The elephant in the room is china and taiwan any conflict in the region will disrupt the entire supply of electronics and this is the main reason for onshoring more capacity.

  3. Avataaar/Circle Created with python_avatars Kristopher Driver says:

    I think ASML is going to make out like bandits with subsidies from every rich country in the world, and half these fabs will be abandoned halfway through.

  4. Avataaar/Circle Created with python_avatars Super Sasquatch says:

    He's angry that the free world is adapting to the threat of invasion of taiwan, korea and isolation of japan by the autocratic powers

  5. Avataaar/Circle Created with python_avatars hohum says:

    With the explosion in AI I think companies like nvidia won't have an issue finding ways to buy up fab capacity.

  6. Avataaar/Circle Created with python_avatars Rob de la Hunty says:

    What is the best CHIP on the market ?Is it the Apple 3

  7. Avataaar/Circle Created with python_avatars KingGear says:

    better to have it and not need it than to need it and not have it. this semi-conductor “glut” can also serve as semi-conductor “insurance” in the further years of inevitable war.

  8. Avataaar/Circle Created with python_avatars Snoopy says:

    Its not about creating new jobs, but national security in critical industry

  9. Avataaar/Circle Created with python_avatars Persian Version says:

    I don't think this video understands the semiconductor industry… Intel is just straight up inferior on a technical level to TSMC. The fabless US companies are able to grow faster than Intel because their chips are built by TSMC, cutting edge technology. I don't think it has anything to do with cheaper Asian labor… I disagree with the thesis of this video.

  10. Avataaar/Circle Created with python_avatars Matthias Warlop says:

    Puts on Intel I guess

  11. Avataaar/Circle Created with python_avatars Osiris says:

    A stockpile is good because of automation, robotics, AI, cell phone turnover, smart devices connected to the 6-G…
    These chips will be used up especiallysincee their prices have dropped.

  12. Avataaar/Circle Created with python_avatars David Meridian says:

    Good info overall, but misunderstands the rationale behind the CHIPS Act, which is in response to fears of supply disruption in the event that China invades Taiwan.

  13. Avataaar/Circle Created with python_avatars Chris Lindfors says:

    Great video! However you seemed to miss the most obvious reason for the United States to subsidize semiconductor manufacturing, national security. In fact I don't think you mention once the national security interest the United States would have in not only maintaining a domestic supply of microchips in the event of potential trade break downs due to either pandemics or war, but also the increased need for those chips during a potential conflict. Even with most semiconductor fabs existing not directly in China, as they expand their sphere of influence the world's major fabs are within an ever shortening reach. The United States is maintaining subsidies in semiconductor manufacturing to maintain their technological dominance and military scale against peer and near peer adversaries.

  14. Avataaar/Circle Created with python_avatars B Rizzle says:

    As usual the devil is in the details. Intel does NOT make the "Chips" that dominate the supply chain problems we see in devices/cars etc. Intel primarily make server-farm and laptop chips. Anyone with half a brain and any knowledge in the semi industry saw this glut coming and the chips act as a big corporate welfare give away to a company already making 50% gross margins.

  15. Avataaar/Circle Created with python_avatars Luci Feric says:

    The world is filled with failed and shuttered chip fabs. Throwing money at chip fabs does not work.

  16. Avataaar/Circle Created with python_avatars Roland Lawrence says:

    the chips act is about strategic independence. also no one is building new 48nm fabs.

  17. Avataaar/Circle Created with python_avatars hydron powers says:

    A country called Russia can surely buy those microchips now 😂😂😂

  18. Avataaar/Circle Created with python_avatars Pat Mat says:

    Bitcoin mining plundered the Graphic Card market, that probably played into the chip shortage too.

  19. Avataaar/Circle Created with python_avatars A Czech Man Going His Own Way says:

    Intel's problem is not that of costs. They fell behind in their fab tech, making their chips less competitive. Intel even started using TSMC to manufacture some of their chips, which is outright shameful from historical perspective.

  20. Avataaar/Circle Created with python_avatars Flavio Herrera says:

    This is why government stepping in with trillions of dollars is never a good idea, its usually just a waste of resources, hint "usually" not always

  21. Avataaar/Circle Created with python_avatars TinfoilTomcat says:

    Central planning wins again😂

  22. Avataaar/Circle Created with python_avatars Glock says:

    AI may increase demand for chips. I'm speculating here. We can see that with how Chinese car producers have problem now because they can't access nvidia chips for their's self driving cars. The more the AI will become popular the more powerful computing power will be needed. Current deep learning model even for imference require powerfull chips with lots of memory

  23. Avataaar/Circle Created with python_avatars Raymond M. Smith says:

    Governments usually get it wrong when it comes to anticipating economic developments, and often, very often, end up wasting zillions of public money in the process.

  24. Avataaar/Circle Created with python_avatars Bass Player says:

    Glut of chips only means one thing more e waste

  25. Avataaar/Circle Created with python_avatars Billy Rockefeller says:

    That was the most neoliberal shit I’ve ever heard

  26. Avataaar/Circle Created with python_avatars Robin hooder says:

    Labor shortage is a big lie, stop repeating the mockingbird media narrative

  27. Avataaar/Circle Created with python_avatars David Macaulay says:

    It’s only a structural solution to a cyclical problem if you exclude things like war, natural disasters, etc. When you factor in the real world redundancy makes more sense.

  28. Avataaar/Circle Created with python_avatars Samson Soturian says:

    This is why I don't approve of any sort of subsidy. It hides the true costs an industry has an economy.

  29. Avataaar/Circle Created with python_avatars Joe Shmoe says:

    well, as someone who is planning to buy a new PC in the next few months, a chip glut sounds good to me. Prices are still too high for GPUs and motherboards.

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