Pat Gelsinger attended the WSJ Tech event in late October and as always had some interesting things to say about the state of the semiconductor industry. In the interview with the WSJ, Gelsinger laid out his view of the current industry environment and the long-term benefits of the CHIPS Act. From an industry perspective, Gelsinger stated that the semiconductor market has softened quickly. This is in part due to the demand that was created by COVID 19, and the industry response to meet that demand.
The comments made regarding the importance of the CHIPS Act to semiconductor manufacturers demonstrate 1) Why the industry had transitioned so heavily to Asia, and 2) the moonshot goal of getting 30% of the manufacturing back on U.S. soil and 20% back in Europe. Gelsinger stated that it is estimated to be 30-40% cheaper to build in Asia and that this will help to level the playing field.
The longer-term question is, while it is 30-40% cheaper to build in Asia, what are the economics of long-term manufacturing? Morris Chang has been quoted more than once about his concerns that the U.S. cannot compete in manufacturing costs. It will be interesting to see how this part of the CHIPS Act plays out, and if Chang’s instincts are correct, can the U.S. manufacturers figure out a way to manufacture chips as effectively as Asia?
Fabless chip companies such as NVIDIA, Qualcomm, AMD, and Broadcom have historically used Asian foundries for leading-edge chip manufacturing. This is partly due to economics and limited advanced manufacturing capability outside of Asia. Intel is currently using TSMC to manufacture FPGA and GPU chips. Will those come back onshore when the new factories are built?
There is also the issue surrounding a critical part of the supply chain: Packaging! While Intel is investing heavily in 3D packaging for heterogeneous computing, what about the legacy packaging for chips such as power management, and display drivers that are manufactured at legacy nodes? These chips will unlikely find a packaging solution in the U.S. or Europe unless a considerable effort is made to bring these back on shore.
Source ASE
So, will the USA meet the moonshot goal of 30%? It’s going to take a concerted industry effort. With Micron onshoring memory fabs and Samsung and Hynix increasing their presence in the U.S, there is a higher probability that we will meet this goal.
China’s Impact on U.S. Semiconductor Market
The downside of the CHIPS Act are the constraints being placed upon US companies doing business in China. On the equipment side, Applied Materials sounded the first warning bell with a $400 million +/- 150 million shortfall in their Q4 earnings, which are yet to be released. Lam Research followed up with a possible 2.5-billion-dollar impact in 2023. At the moment ASML does not foresee a huge impact, and KLA is anticipating some fallout but has not yet released numbers. Since the Biden announcement has only impacted one month of Applied Materials Q4 earnings, one could extrapolate the potential for a 1.2-billion-dollar shortfall in Q1.
The Table below shows the percentage of revenue averaged over the past 6-7 quarters for the top five semiconductor equipment companies in revenue:
- AMAT 33%
- ASML 18%
- Lam Research 32%
- TEL 26%
- KLA 28%
If we are conservative and estimate this at 25% for the industry, and then use the 2022 estimate of 90 billion dollars for equipment spending, China is spending in the range of $22 billion for equipment in 2022. LAM’s estimate of 20% less equipment spending in 2023 most likely includes China as well as the rest of the industry’s reduction in Capex into account. I would estimate that China’s percentage of the 2023 revenue loss could be as high as 75% of that new forecast, possibly as much as 14 billion dollars.
The revenue loss for the equipment companies, as well as the revenue loss for chipmakers that, for now, are prohibited to sell chips to China, will have the opposite impact on the employment aspect that the CHIPS Act hoped to have. Typically, when you get a 10-20% loss in revenue on the equipment side of the industry, layoffs are soon to follow. Intel has already announced job cuts, and the probability is high that announcements will soon follow across the rest of the industry.
As Gelsinger said in his interview: So, fundamentally, we have a long-term growth cycle in front of us, we also have near-term wild cycles. Not much different than a normal cycle in the industry except that this one has 52+ billion in Government incentives behind it. So, catch your breath we are in for a wild ride.
Feature Photo: Intel’s Pat Gilsinger appears on WSJ Tech Live. Image source: Intel
