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Investing in chips, the real gold right now

Investing in chips, the real gold right now

If we look at the graph of the Philadelphia semiconductor index, we can see how this super demand for chips is affecting the price of chips worldwide.

We go in parts. What are semiconductors?

The chips are called semiconductors or integrated circuits and consist of a series of electronic circuits printed on a tiny cube-shaped conductive material, which is usually silicon. Combined with other components, they form a more complex integrated system and perform a specific electronic function. They began to be used in 1960, when they were created. Its design and manufacture is complex and is part of the current shortage. They must be manufactured in highly controlled environments, as temperature spikes, static electricity or dust can damage their operation.

Shortage disruption

Structural cuts in auto industry production have been announced. We know that Ford Motor had announced an employment regulation file with 630 layoffs and disappearance of the night shift in the Valencian factory. Volkswagen CEO Herbert Diess told a press conference that 100,000 cars were lost due to a shortage of semiconductors. Daimler said the semiconductor shortage will affect its first and second quarter car sales, although it said it hopes to make up lost ground by the end of the year. And like this example others more.

But it doesn’t just affect this industry as chips are everywhere: they run water treatment plants, in military and aerospace applications, power lines, and just about any product that plugs in these modern life companions now carry.

Given the only 10% of semiconductor manufacturing is used for auto parts, automakers don’t wield the same bargaining influence as the consumer electronics giants. Without an immediate solution, the shortage is expected to last at least through 2021.

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The demand is increasing

The rating agency Fitch comments that this is the result of strong underlying demand for consumer electronics, which they estimate will continue throughout 2021. “In a way it has been driven by the pandemic”.

The restrictions so far have not caused a shortage in the supply of laptops or televisions, which depend on the IC (DDI) chips used for electronic displays, but if the confinements are maintained, some analysts believe that it could happen. Just look at what happened during the worst of the pandemic in 2020.

The global consumer electronics market is anticipated to grow exponentially over the 2020-2026 period, with a projected value of 1.5 billion in 2026 from a value of 1 billion in 2019, implying a CAGR of 7%, with a high demand from countries like China and India.

The main beneficiaries of the strong demand will be Taiwan Semiconductors (TSMC), which enjoys strong short-term pricing power, with a market share exceeding 50% in the foundry industry and in which revenues may increase to a CAGR of 10% -15% between 2020-2025, favored by the diversion of orders from Semiconductor Manufacturing International (SMIC) after the sanctions imposed by the United States on the latter.

Samsung could also be supported by its foundry unit.

So much is the fight for chip-making supremacy that California-based North American Intel appointed a new CEO in an attempt to regain TSMC’s current chip-making leadership. Other North Americans are NVIDIA, AMD, Micron and Qualcomm, responsible for the design and manufacture of many of the most advanced chips.

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