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The forces driving the semiconductor boom are far from over

The semiconductor industry has long grappled with a notorious cycle of nasty booms and busts. Now, however, the industry is confident of beating past patterns to prolong what is an extraordinary race for the sector.

The industry, which reported a 26.2% rise in sales to a record $555.9 billion last year, wants to pour record sums into new manufacturing plants, or fabs .

Taiwan Semiconductor Manufacturing Company, the world’s largest contract chipmaker, is preparing to spend another $44 billion to increase capacity this year. Likewise, Intel is planning a multi-year expansion worth up to $100 billion to build what could become the biggest factory ever.

Such splurges in the past have led to overcapacity, often as demand declines. And now warnings are starting to appear about current conditions. Several analysts say the pronounced chip shortage that has kept fabs full and driving up prices could turn into a glut as early as 2023.

“There are concerns that there is overcapacity,” said Dylan Patel, chip expert at SemiAnalysis, a research group. “I see this cycle is longer than in the past, but I also see the next down cycle is deeper.”

There have been signs of slowing demand in some segments for months: Chromebook sales fell sharply after pandemic-induced demand for low-cost laptops for online school lessons was met.

Demand for internet equipment is also slowing as families working from home upgrade their Wi-Fi equipment. Similarly, sales growth of LCD TVs and online gaming gadgets are expected to decline as restrictions ease on coronaviruses allows consumers in Europe and America to go out again.

But many industry experts say this is just the beginning, not the end, of an extraordinary boom for the global semiconductor market.

“There’s nothing normal about this chip cycle,” said Dan Nystedt, vice president of TriOrient, an Asia-based private investment firm. He added that the disruption caused by the US-China trade war and then by Covid-19 led many in the sector to misjudge demand and underinvest. “There are bigger trends that are likely to drive demand up for much longer,” he said.

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The chip industry was once powered by one or two key devices such as the personal computer and then the smartphone. The rise of artificial intelligence now enables the use of chips in almost everything, from cars to factories to household appliances. Then, additional computing power is needed to store and process the large amounts of data collected on “smart” devices and infrastructure.

As a result, the semiconductor content per device is skyrocketing. Applied Materials, an American chip equipment maker, predicts that a smartphone will contain $275 worth of chips by 2025, up from $100 in 2015. Chip content per car is expected to rise from $310 to $690 per server data center from $1,620 to $5,600. the same period.

Besides this increase in demand for chips, there is also a structural change in the end market. “For 20 years, the main end user has been the consumer. But now the industry can return to a situation where companies and governments drive demand,” Nystedt said. “While consumers want low-cost products, businesses and governments expect quality. This could change the price structure.

Chip executives therefore believe that comparisons with past industry models, which have seen cyclical declines every two to four years on average, are insufficient. Moreover, as building state-of-the-art factories becomes increasingly expensive, large capital expenditure increases by TSMC and its rivals Samsung and Intel do not mean equally large increases in capacity.

“Most people would be amazed to see that these investments will result in a 10 to 15 percent increase in capacity per year over the next few years,” said Sebastian Hou, managing director of Neuberger Berman, the investment manager. “That’s probably just enough to meet the increased demand.”

Adding to this dynamic is the weakening of global supply chains as governments from the United States and Europe to Japan and China seek to build local capacity to protect themselves both from geopolitical rivals and risks of disruption such as during the pandemic. This means that customers are likely to stock up on larger chip stocks to ensure they have enough.

“We were very efficient under the globalized supply chain, but the efficiency will go down,” Hou said. “More capacity will be built than was deemed necessary as part of the globalized supply chain.”

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