Stacy Rasgon on How the Global Chip Crisis May Be Getting Even Worse

was like our entry into global supply chain issues. Um, we started talking about semiconductors and this idea that there was a shortage of these chips that were needed for all sorts of things. And I think, you know, if you are of a certain age or generation, you tend to think of semiconductors is something that goes into a computer. But of course nowadays they show up in phones, in you know, things like refrigerators, and of course some cars

as well. Just almost every major appliance now seems to have some sort of chip embedded in it. Right, And we did like a six episode series I think, earlier this year about chips. But the chip story, even though we haven't talked about as much lately, it really hasn't gone away. And I think I just saw last week there was a story about some chip manufacturer in Malaysia

reducing production. They're pretty regular stories. You mentioned automobiles about car companies still not being able to get an adequate supply of chips and thus being forced to cut production. So they the issues have not gone away by any straight. Yeah, I think Toyota made a massive downgrade to its expected production. But yeah, so this is something that I've been wondering about.

So on the one hand, yes, we have some COVID outbreaks in Asia that have disrupted semiconductor factories or manufacturers, particularly in Malaysia where they manufactured. My understanding as they manufacture some components for semiconductors or something like that. So okay, you have the Delta variant and that's not production to

some extent. But on the other hand, you know, as you said, this issue has been going on for quite some time now, like more than a year, and the big question is why aren't we getting to a better place in terms of production at this point. The semiconductor companies know that they need to boost production. They know there's lots of demand out there, so why isn't that happening. Well, hopefully we are going to get some answers today on the show. Why it is that we're now in the

middle of September. Uh, and we still don't have something resembling like a smooth semiconductor supply chain. We're gonna be going back to our first guest that we had on the Semiconductor series. I think he actually appeared twice already. The last time was in March. We're gonna be speaking with Stacy Raskin. He's managing director and senior analyst at Bernstein covering u S semiconductors. He's going to hopefully answer all of our questions. So Stacy, welcome back to Odd Lots. Oh,

it's great to be back. Thank you for having me again. So are we right? I mean, it appears not only are the issues persisting like in some some in some measures, things seem to be getting worse. Yeah, And so we had hoped that by now things would be getting back to some semblance of normalcy, and and you're right, they're really not. It's actually getting worse, not better, in many parts of the market. So we still are seeing you know,

production shortfalls, we're still seeing shortages. You know, We've been hoping obviously that you know, COVID would be you know, on on the decline at this point, it is not it is still causing disruptions. You mentioned Malaysia and some other areas. So yeah, we're we're we're not back to normal yet. We're still seeing some of the same issues that we've been seeing for quite a while. So what

exactly is driving those disruptions then? So you know, you mentioned some COVID outbreaks in parts of Asia, but it seems to be you know, we might see some factory closures, some isolated factory closures, but it seems like the issues are sort of more endemic than just you know, an outbreak at a particular factory. Yes, I mean may be helpful to go back a little bit and talk about what caused these shortages in the first place. And I talked about this, I think I can't remember, maybe it's

the second time that I was on. But if we if we look at the automotive sector first, that that's where we're seeing some of the biggest issue. We've seen the biggest issues all the whole time, and you're right, we're still actually seeing production costs. You mentioned Toyota. We also had recently, GM and Ford and a bunch of others and then it's been going so they're still seeing shortages. You have to remember the issue there was initial supply

chain whipsaws. You know, in the in the beginning of COVID, factories got shut down. Um you know, people were locked in their houses. They weren't driving demand at least initially for for small amount of time plummeted and remember the auto vendors canceled all their orders. Demand came roaring back obviously the plan started opening up. They went back hat in hand to try to get capacity, to get pret action,

and it just didn't exist. And it was like, well, you know, get in line right, it'll it'll take time. And remember what I said. You know, even if you're starting, even if you have the capacity available, it takes months um to make these chips from a from a dead start, and so that caused you know, cascading effects. I mean it still has, right, and you know that. The other issue in the other end markets was just demand is very strong and that was part of the reason we

saw issues in auto as well. I mean, the capacity that they were using got back filled in many cases by other stuff. But just in general we've seemed really really strong demand I mean much stronger than I think anybody thought was was going to be possible in things like PCs and like anything that was sort of work

from home, study from home, play from home. Um. I think you also need to couple this with the fact that the industry itself, I mean, you know, remember SEMIS it cost billions of dollars dead capacity, and you know, historically they you know, they added capacity to demand that they saw and when demand was very very strong, much stronger than I just didn't have, the capacity was avail. And because that demand is still strong, you know, we're

still shy, we're still short, we're still tight. Um. And so now you have to layer on on top of all that. Though you remember this, this stuff is never smooth, and when you have these kinds of problems, they do cascade and they cause more issues, and it's just it's just a big mess. I mean, it still is. And so it hasn't we haven't had time to actually bring enough capacity online to to alleviate things. And the demand.

You know, in most parts of the market we can talk about where people are worried about demand maybe starting to roll over a bit, but in general, demand is still strong. Supply is still tight um and and we've still got problems and it hasn't it hasn't alleviated yet. And now you throw you know, the resurgence of Delta on top of us. And again you mentioned Malaysia. What they do A lot of Malaysia they do what's called

back end. It's a lot of what what's called packaging, So they don't necessarily they don't have like semiconductor factories in Malaysia. They're not making like chips. Once you actually make the chip in the factory, you have to what's called packaging. You have to put the electrical leads and everything on it's such that you can take that chip

and actually put it on a circuit board. So they do that kind of stuff assembly and testing and other things in Malaysia, and a lot of those issues were impacted in a lot of that stuff is done in Southeast Asia and and a lot of those, uh things were impacted by by COVID. So that's just something else icing on the cake on top of everything else and not getting better. Yeah, that was one of the things I remember we talked about one of our semi conductor

episodes with Willie she at Harvard Business school. And obviously, just like in addition to the sort of technical challenges,

any given ship has a highly globalized supply chain. And so as you mentioned, maybe it gets manufactured to wear in Taiwan, but then some sort of packaging happens in Malaysia, and so there must be to some extent issues that are the sort of generalized supply chain issues that are affecting more or less everything must have some having some impact on semi conductors specifically, it is and so you right, so semis are extremely global, and I forget, I forget

how many different borders the average semiconductor crosses like in its in its lifetime, you know, from from initial production to actually getting sold to the end user. But but it's a lot, right, and you're right. They can be you know, it can be a US company that's using the Taiwanes foundry to make it, where it gets packaged in Malaysia and then it goes to a distributor in China, and like it's it's all over the place. So there's there's a lot of that, and there are big logistical

channel the challenges that we're seeing right now. Shipping costs are actually getting getting much higher We've seen ports shutdowns in China and other places as are trying to control the spread of of delta um. We've seen container ships like like stacking up. I think maybe I can't remember a fifth if the sewers canal was blocked the last time we said that, I can't remember. But we're seeing tons of a logistical challenges. A lot of semi conductor

comes in front. The other companies too, are starting to talk about this as well, like when when they talk on earnings, calls and everything. We're starting to see some of those costs go up and some of these supply chains are are are it's it's it's it's just a big hot mess. I mean, the whole thing, which I guess shouldn't really be a surprise is I mean, again, you know we had a global potential global catastrophe. You

know that was it was causing. I'm part of me is like amaze that it's been as resilient as it has been. Frankly, but but it is, it is it is still causing problems and and and it's funny like that. Obviously, the question I get the most is how long is it gonna last? I wish I had an answer. I don't, you know. And it's really funny when you when you think about the stocks right and and and the companies,

I mean, they're they're still putting up monster numbers. The sector right now, in terms of revenue is on track to grow probably twent this year and blow past five billion dollars for the first time in in in history. Um and and every quarter of the companies are putting up better and better numbers. And I would say investor conviction is getting less and less like the higher the numbers go, because we've all seen this number this movie before.

We see this massive strong demand. Nobody really knows how much of it is real and how much of it is phantom. We talked about double ordering and everything else the last time it was here. Um, you know, this is when when things were uncertain, they order more and and and so like. It's it's funny the stocks haven't done much of anything, you know, even as the numbers have you continued to go up and up and up, because people still don't know how sustainable this, this this

strong demand is so stacy. This is something that I

wanted to ask you about. So you know, you mentioned this cascade effect early on and you didn't mention it specifically, but there is this bullwhip effect that seems to be at play where everyone was expecting demand to drop, companies cut orders, so the semiconductor manufacturers UM sort of backed off from production and then things turned out better than people had expected and there was loads of demand and the semiconductor companies have been trying to catch up ever since.

But I guess my question is, like, one, is there something in particular about semiconductors and the manufacturing process that makes them more sensitive to the bullwhip effect um, this cascade idea. And then secondly, one of the things that comes into play when there's a shortage a supply shortage is every when starts stockpiling, right, So it's hard to tell what's real demand versus what's just people hoarding components because they think they're not going to be able to

get them. So what's your sense of that at the moment, real demand versus stockpiloting. Yeah, yeah, so let's let's address the first question. They're like, why are semi's the bullwip right? Um? Yeah,

it's there at the back of the supply chain. So then you think about them and I'll take a microprocessor for a PC just as a simple example, you know, like Intel or am D or whoever makes the processor, and then who does that get sold to, like a Taiwanese O d M maybe it's called Original Device Manufacturer who builds like a notebook computer and then they stick it on a plane or a boat, right, and they sell it, you know, they send it off to HP or or something like that, and then HP, you know,

sells it to best Buy and then best Buy sells it to you or like. However, there's probably other steps in there as well. But there's a lot of points within that chain where you can get inventory building or bleeding or anything else. And and the fluctuations tend to magnify as you work from the front of the chain back. Um. This is a very well known that the thing you see it all the time, and the semis are at

the back of that supply chain. So small fluctuations, even small fluctuations and end demand like at the customer level, can propagate backwards and have corresponding a larger impact like the farther back you go in the chain, and the semis are just at the back. And and remember I

think we talked about this last time. But you know that the semi companies have to plan in this environment, and their actual my opinion at least, is that semi conductor company management teams their actual visibility into what their end customers are truly doing is precisely zero. They have no idea. They do the best they can. I'm not I'm not blaming them. It's not good or bad, right, it just is right. And the best companies out there, like A are willing to accept this and and deal

with it. But their actual visibility is not great. But by the way, companies are trying to do some stuff right at you to to get to your second question around potential double ordering and stock piloting and so so. Yes, this this is a standard kind of behavior, and probably not just in semis. I mean this is normal human behavior, like when you can't get something that you need, you tend to order more and again. This is a phenomenon known as double ordering. And I mean a simple example.

Let's say you're making widgets and you need you know, a hundred semi conductors you know whatever, right, and your inventors says, okay, I can't, I'll give you ten. I can supply ten and i'll give you the other you know, ninety the you need, I'll give you those in fifty weeks. So your next step is to order a thousand semi coffer from wherever you could hope to cobble them together on the hope that you can build up the hundred

of leading and then you cancel all the other orders. Right, And so what semi conduct investors tend to watch for that this is a fundamental phenomenon as lead times like how long does it take to get the product after you order it, and those lead times are stretching out. What what what investors tend to watch for is when the lead times start to pull back in because that's usually

when the cancelations start to happen. And so what a lot of companies are doing right now is they're actually doing things like putting in long lead time orders non cancelable orders, for example. Generally in the space historically that you didn't do that, there were no penalties to cancel orders, um companies. Now some companies are starting to put things like non cancelable orders. Other companies are parsing their orders.

It's like, well, I know this, customers ordering a hundred parts, but I think they only need thirties, so I'm gonna only ship them thirty. Right. We're seeing some of that as well, and so the companies are doing the best they can in this environment to try to manage through. It is their stockpilot going, undoubtedly their stockpilot. I don't see how there couldn't be. Can you measure it? No,

it's hard. So and I'll give you an example, like there there are some cases where, again you go, look at the auto vendors, even if they're stockpiloting, and whether they may be stocked by some much, but we were still seeing actual production cuts. So clearly, you know, even if they're they're stockpiling some parts, clearly they don't have enough of what they need to build the cars that

they want. Right, So we're still seeing some some some primary examples here of situations where actual shortages, where the shortages still seem to be real, because we wouldn't be having actual production cuts if they didn't have actual shortages. Obviously, this is what you sort of described is going on in a range of industries. Are we gonna hit one day?

And could this be a source of investor concerned? We're like we wake up and there is just a crazy blood of chips because so many entities or is it so is capacity so constrained generally that it's just hard to imagine there ever being a point where there's a huge oversupply. I mean never never say never, right, and the normal practices, Yeah, you'd wake up one day and you'd see a glut that that is normally how this

would happen. And again, like this is why investors are worried, and this is why even though the numbers are going up, the stocks aren't really going up all that much. Multiples are coming down, and people are worried. You know that we're you know, getting closer to peak, right, And I guess mathematically, like by definition, we're getting close to peak every day. At the same time, we could be quote unquote post to peak for quite some time, right, because

as long as this stuff's working. Again, the other thing you need to remember with with this is even though demand is really strong, I mean like you need, you need everything. So that's the thing is like the auto values.

See I'll pick on the auto vendors again, like I mean they could be getting percent of everything they need, but if they don't have the five percent that they that they need they can't chip the car, right, And you could have a situation where like you have auto vendor A you know they have and they're they're short

five percent. An auto vendor V hascent what they need in their short five percent, but it's a different five percent, right, Um, so that maybe something what we're seeing right now is like I I don't know, like at some point we may get a glot and now. At the same time, you can also argue that like post COVID, some of this demand is real and so like like I'll look at PCs for example, PCs right now we're incredib have

been incredibly strong. I mean we were doing two hundred and fifty to two hundred and sixty million PCs a year pre COVID, Like we did three hundred million one right now we're on track to do probably close to three fifty, which would sort of match the peak in the industry, which is in and there's a big controversy in PC PCs. Right our PC is gonna grow next year,

they're gonna be down or like whatever. But even if they're down, they're probably not going back to to fifty, right probably not like we I could argue that there's a structural case. I mean, like like whatever the normalized run righted pieces ought to be, it's probably higher than it was pre COVID. And you can make that argument

about a number of event markets. And so even if we get a glut, some of the things we we probably had pulled forward in digitization and everything pre COVID or since pre COVID, and we've got more people doing remote. Remote work is going to be a thing from now on, like whether or not, like people start to go back to the office is more. Um, I could argue that some structural level event things should be higher, you know, in terms of capacity. I think Tracy, you asked during

the intro, why isn't the semiconductor industry added capacity? It just takes time, right, They're all trying. I mean you can go look at like this the Semi cup guys like like way for fab Equipment w f E is is going through the roof right now, and you've got big forecast from from big companies, you know, throwing out big numbers in terms of what they're planning on spending over the next few years. Capacity probably will get added.

It just takes time. To get added. So the worry, obviously is that capacity comes online right when the man starts to roll off, and I don't know what it's going to look like. I guess, well, this year will probably be fine. Still in terms of the fundamentals and numbers, we'll see what two and twenty three look like. Those are the kind of time frames we're probably talking about in terms of supply coming on UM and we'll see how well it is to well mactually is to demand

like when it doesn't. So I wouldn't expect this to make a massive difference to the supply demand imbalance. But what are the chances that you start to see customers, the people who are actually ordering chips just back away or decide they're going to design more analog stuff, um,

you know, in order to avoid this problem. And I'm thinking specifically, you know, last week, Bloomberg grand an article about air conditioning manufacturers dropping copper components because the price of copper was so high, and they're all starting to not all of them, but some of them are starting to switch to aluminum. So I'm wondering, like, could you see a similar thing with semiconductors or is it just you know, pretty impossible given the nature of the types

of electronics we're talking about. What do you mean like switching away from semi connectors to something else? Yeah, I guess, like I guess going analog. Right, there were like a few car companies that were saying they're going to like drop some of the complicated electronics in order to produce Well, we we are seeing some of that. So some of the car we seem like cars. I'll make it up, but like you know, shipping without you know, the the

electronically controlled rear view mirror or stuff like that. Right, we're seeing some things because I remember, you know, if you're gonna ship a car, you kind of need the full kid. If there's things you could leave out where the car is still sailable and then add them later like you could do, we're seeing some of that. The other thing we're seeing with like Auto that or sometimes

is they're building the cars like everything. They're building the car complete except for the stuff they have, and they're parking it so that when they when they get the park they need, then they can ship. I actually suspect we're seeing this in PCs as well. My math and we published as my mass suggests that as strong as PCs are right now, I think CPUs shipments, the microprocessors

shipments are even stronger. And we've heard like like HPS sort of talked about on ARMIS calls about building things like strategic Inventor. I suspect they're building kits, you know, and and and sitting on the shell phone. So as soon as they get the final parts that they're missing that they can they can ship. So we are seeing some of that. So you can call that stockpiling in some sense. Right, It's hard to know how widespread it is and everything else, but I mean it's a normal

behavior that we might see in cars. We are seeing, to your to your points of some of these things are getting left up. But the thing with cars, you can't just like like we we can't go back, you know, Like my first car was the Toyota Corolla. It didn't

have very much in the ways of semi conductors in it. Right, We're we're probably not going back to something that you can't all right, And in fact, some one thing we're seeing from the auto vendors, the limited supply of semis that they do have, they're actually selling higher end cars, right, They're actually prioritizing because the profits are higher, right, So they're they're they're they're they're saving the limited semi editors.

They have to actually make as most money as possible with them, and so in some cases we may be seeing like mix actually going up rather than rather than down. Oh yeah, I've wondered about that with with with various industries, the degree to which, like, okay, if you have a shortage of components overall. I remember we were talking about this a little bit. We actually did an episode several

weeks ago, like on bathtubs and appliances. But I've been wondering the degree to which end users of technology or raw materials are changing their mix and prioritizing the production of the the higher margin lines. Yeah, it's it's hard to know. I do think in auto we we've seen that in other end marketing, and I can mention graphics cards of them. I mean people you can't even buy a graphics card right and they're just selling everything they can make right now. Um, But yeah, I do think

we're seeing some of that us anecdotally. Um, we are seeing it. How much is you know, obviously on top of everything else, one is seeing this incredible crypto boom. How much does that contribute at the margins too tightness in the semiconductor space, and how much as a professional semiconductor analyst does that force you to get to know this sort of new industry. Well, it's it's not that

new anymore. And we've seen a number of crypto crypto booms and and and busts over over the earth fair enough, I don't think like so you can talk about like like the crypto impact on shortages in a couple of different they're just like, for example, of shortages of graphics cards and again go try to buy one. The other is like taking a capacity at the foundries. And I remember duringen you had a lot of the bitcoin minors, guys like bitmain that make custom chips to mind bitcoin.

I think at one point they were a ten percent customer of t SMC, like for a heartbeat, right, So for that was like back during the bubble. I don't think we've seen anything nearer that much for for their for the the guys that make the custom mining chips this time. And I don't think t SMC has been prioritizing those guys nearly as much. But in general, I mean, we've just got tightness all around at the leading edge, and certainly that's been part of the problem with with

graphics cards. It's been hard to get, and obviously the demand has been very strong. I'd also say like even beyond with for graphics are even beyond crypto. The gaming

cycle this time is much stronger. Obviously we hit we had COVID, and people were trapped in their houses and they wanted to the video games were a good way to pass the time, so they wanted to buy the cards and the products from both in video and A and D this time were actually much better than the prior cycle, which was kind of like you know, second half of and so there's actually a lot more I think demand from gamers for the parts this time versus last time where I where I do think a lot

of that incremental demand um was from the cryptomotis. And so what happened in nine when the miners stopped buying, the gamers didn't really want to step up and pick up the slack, and so obviously we saw some fairly big shortfalls, you know, the beginning of end of eighteen, beginning of nineteen for for guys like in video this time that their news cycle. It's called it's called amp here is is the code name for it. I do think actually gaming demand is quite strong for it. They

can't get the parts. So one hope for in videos is if and when the miners stop buying that the gamers will start to pick up the slack okay, and we'll see like we're we're not there yet in terms of the demand is still like off the charts I think for for both the video and am D for for game for graphics cards. So let's talk about I think actually the first time we had you on who was about like the fall of Intel or Intel Stumble. That was like the first theme and of course it

had a pretty rough and they had fallen behind. So that so then they bounced. Then they hired the new CEO, girl singer, and the stock rallied and people like this idea of like, oh they're gonna like reinvest in production because that's the core issue that we talked about, there's falling behind our productive capabilities. Now the stock has had a pretty rough year once again, So what is the current issue. What are the big concerns right now facing Intel?

You bet it's a few things. So you're right with the day they hired Pat Elsoner, I think the stock was up and I get like, I like Pat Patt is the guy they probably should have hired two years ago, right, and so he's he's the right guy for the job. I think now that things that he's not a magician either, and he has to play the a hand that he's been dealt, and the hand that he was dealt is

pretty tough. And I think I said this the first time it was on But the problems that Intel's having, they didn't just develop like over the last couple of quarters. These have been ten years in the making and they're not going to get fixed in a couple of course. They will probably take five or ten years to to to fix. And so they've done a few things. Actually since we chat, I think that was the last November when we chatted, and and so we've we've they've done

a few things. Um number one, we talked a lot about their difficulties at seven animeters. So they're claiming that seven animeters is now fixed. They're claiming the issue was they didn't they weren't using eu V what's called extreme ultra Violet mothography, which is a very advanced type of patterning technology to make very small features. UM and I guess that that that is their their public stance on

on what the solution was they're gonna use. They're gonna be much bigger using e V and that's going to fix the problem. It's also, by the way, clear probably why they didn't want to use it. It's very expensive. Their capex this year is gonna win up to something like twenty billion dollars and that's not foundry, that's their their own core business. But they don't really have a choice,

so they they've claimed that's fixed. They've also now I don't know, a month maybe two months ago, they put out a roadmap and this road they did a few things. Number one is they adjusted their their nomin Remember we talked about the node nomenclature and how like Intel nodes didn't correspond to t SMC nodes in terms of process. So they've changed their nomenclature to ALIGNE. Okay, so what they were talking about seven naneties before that that is

now Intel four for an Okay, fine, what whatever. I'm not going to knock them because they were they weren't gaining anything by being a pedantic about it, so I mean, okay, fine. But then the other thing is they said they're gonna

do kind of like five evolutions in four years. They're gonna do they're doing ten now, and they're gonna go to I think I can't remember what it's called ten Enhanced super fin or something, and then they're gonna go to Intel four and then Intel three, which is like like an enhanced seven, and then they're gonna go to something called twenty and twenty A is like in back in and twenty A technology, We'll have a couple of

new innovations. It's gonna have something called a gate all around transistor structure, which we could talk about what that is, but it's a new type of structure to on the transition to get higher performance and and everything. And so that's that's one thing. The industry, by the way, is wrestling with that technology. Samsung has at the roadmap intels now putting it on the roadmap, and they're gonna have something called back backside power, which again we can talk

about without some innovations there. And what they're basically saying is by that time frame, by that sort of like five time frame, when we introduced this twenty A process using this you know, this gate all around orchanization, we will have we will have caught up and then surpassed t SMC at that point. So they put up this roadmap that says, in like four or four or five years, we think we can close the gap with t SMC and and and beyond we will surpass it. So a

couple of things with that number one. Even even though it's it sounds good, it's a very aggressive roadmap. Like I said, it's sort of four iterations in five years and they're there, you know, trajectory and execution of the last decade. You know, this would be a big change.

So more power to that they can do that. But the problem is that even if they can execute on it, and it's not a done deal, they basically came out and told everything, we're still gonna be behind for the next four years, right, So the window is still for everybody else to attack us is still open for at least like four years. So that was the was the dark side of what they were saying. So even if they execute on it perfectly, the windows still open for

four years or more. And if they don't execute on it, they're screwed. But he had to come out and put a credible, like a semi credible like like statement out that this as we can close they got because his alternatives to laid out and die right, because if they can't catch up by that or whatever, they'll they'll ever catch up. That that's it, right. So that's that's one thing that they're doing. Um. The other thing they're doing

is they're they're making more use of outsourcing. And again when they it's they're they're doing a lot of stuff in house. They're doing some more more stuff at t SMC and so they're booking capacity I guess three n animated capacity at t SMC and so we'll see what kind of products they make. They're actually doing some graphics stuff over there now, and they're gonna be doing some other things. And then thirdly they're gonna be focusing on

on specialized packaging. What's what's what's called chiplets where I'm disaggregating the chip into various types of functionalities and making each of those smaller pieces potentially different places and then combining those together. And this is something we're intel things. They have an advantage and they've got very good. This is packaging and they've got very good packaging technology, but so do others. And so we'll see all this works out.

So that that that's sort of the plan, right, and then and then and then and then they're gonna be building out all this foundry stuff and to do that, they're gonna be getting subsidies. Right, So this is the

other the other things. So that in general that the strategy, like like some simplified, is to try to stabilize the roadmap, try to put out some sort of credible path to catching up, and and thirdly to beg for money from the government, which whether it's not a dumb idea, right if if anybody, if there's any time right now they to go get money from from governments to build out

sending a capacity. Now is the time. So this is something that the Biden administration has been you know, specifically calling out and targeting, um the idea of making the US stronger in semiconductor manufacturing. Like how much of a difference could that make to future supply demand balance? Well, they probably I was right now. It's fifty two billion dollars I think is the number on the tip, which which frankly is a rounding error. Again, t SMC is

talking about one single company. They're going to go spend fifty sorry a hundred billion dollars over three years one company. So the US right now is saying fifty two billion dollars, which is manufacturing and lady in a bunch of stuff over like a five year period for the entire US based industry. So, I mean, it's that kind of gives you an idea of the scale. Um, it's probably not gonna make much of a difference, but but it's a start.

You gotta start somewhere. And then like I said, well we'll see like like how they get spread out between Intel and Samsung and TSMC. And it's funny, you know, Intel, like they did a paid article in police to Co a little while back where I mean gals was basically saying, don't give the money to foreign companies, give it to us because like TSMC, like they're gonna build it. They're

building this factory Arizona. It's five nanimeters. By the time they bring it online, that's gonna be lagging edge and they're gonna leave all the leading edge I P off shore, And so you should give the money to loss effectively, it was saying that which which is? I personally think if we're really interested in building up the US like supply chain in semis, you need to make it resilient.

I don't think he can bet on one company. I think you need to spread the wealth around and guys like TSMC and Sam's they already have customers, like really, and Intel's talked about they're gonna work with Qualcomm and some others like in like five years, like maybe we'll see, right, TSMC and these other guys have customers today, So I'm of the opinion it would probably be better to spread that wealth around um and and we'll see a fifty

two billion dollars is where it stops? Like I don't know, Like I think if we really want to make a difference, we need more. But but it's a start, so we'll so we'll, you know, well we'll see. You know, there's some other issues with within tel. We talked about the stock. I mean, the strategy sounds credible, so you could ask this on wise of Stock been like such a dog.

The problem is that he's you know, they've been running around like trying to draw up excitement for what this vision could look like and I get that, but I'm of the opinion they're about that they have to drop a hammer on us because you start thinking about this this stuff, like what what's gonna what's gonna happen in terms of capital and capital intensit is going up, free cash is going down, Gross margins next, you're way too high. They need to come down. Um. They're talking about they

think PCs are gonna grow next year. I personally think that they're saying that because like they're screwed if PCs don't grow next year. Right, Um, I think numbers need to need a fairly sizeable reset. And we've got they've got an Animals Day coming up in November when everybody's sort of widely expecting them to give us like the model, like what is the vision for what this thing looks like during the transition as we go from where we are now to where maybe we're going in in five

years or whatever. Um. And people are really hesitant to do anything with the stock in front of the anialyst day because we don't actually know how low things like gross margins and free cash flow and everything are gonna go. But you can make the case that they need to go that they need to go a lot lower than

they're getting modeled right now. So so this sort of brings back you know, even prior to so okay, during the last eighteen months of COVID and so forth, chip industry demand has been extremely strong, and that's contributed to the tightness. And one of the themes that we that was discussed even prior to COVID was that the chip

industry seemed to be getting less less cyclical overall. And so, you know, for years the eighties and nineties, I think chips were seeing as this classic boom bust industry and then for years going uh, you know, I don't know. The last decade there's just been the secular growth in semiconductors overall because they get put into like everything from cars to refrigerators to computers, bcs, two chairs and so forth.

Is there any is that fundamental theme expected to continue that regardless of what happens, the secular growth of chips is going to continue, or are there concerns that at some point some of these boom bust cycles might return. I don't think that those two things are mutually exclusive, and so I'll give you my own just a number one. Let's let me put the near term cyclical concerns aside

for a moment. Long term, I'm actually more positive on on Semi's coming out of COVID than I've been in a long time in terms of that secular growth theme. I am. And look, you know this, the sector I mean, like last year was four and forty billion dollars. And off the base, even if Semis just grew five percent a year over the cycle, you have a trillion dollar industry. By and by the way, this year, Semis are probably

not gonna grow five percent. They they may grow twenty five percent this year off off of that four and if they did, we we get pretty close to five

d and fifty billion dollars. And so well, we'll see what things do, right, but you're gonna have a lot of growth this year, and so like even if we go into a downturn next year, who knows, maybe we we could right sure, um, you think about like that runway, We're we're likely still be well over five billion dollars would be my guessing, even in a downturn scenario, which is much higher than we were. Um and and and long term, this idea of like, is the industry someday

a trailion dollars? I think absolutely it will be a trailion dollar. And whether it's twenty thirty five or like what what have you. Um I think a lot of the trends were seeing a real this whole idea of of of of content increase and and and digitization and everything else. Some I'm a firm believer, and more so than I have been. UM So I'm pretty positive long

term and semilies now the near term cyclical. This is kind of interesting because you kind of mentioned like semis used to be really really cyclical and then they got less cyclical. What we used to see we used to see these big supply cycles where like supply would exceed demand and pricing would would would follow when you get these really big swings. And the last really major supply cycle we had was was the tech bubble, like two thousand,

two thousand one. Mostly since then we had what we are it called inventory cycles against semis are the back of the supply chain, and you get fluctuations in demand that can propagate backwards and you get bigger swings and and usually was inventory cycle happens when like the customers of the channel starts to bleed or build inventory, and so they they reduced purchases of semis for a little bit, and they bleed out inventory where they increased purchases, and

they build inventory, and so semi's overship or undership demand, but it's much shorter. They tend to last a quarter two or three and and and they show up as kind of like resets, You sort of reset the base either up or down, rather than these big swings. You look what's going on right now. We're we're having a good old fashioned supply cycle right now. We haven't had

one of these for a long long time. So I don't know how this is a ladin Like Historically, they tend to end badly, you know, And so we'll we'll see. Although I could also argue that, like I said, maybe some of the secular drivers of the industry are and they you know, they were if you go back to when we used to have big supply cycles, I would I would argue the secular growth in the US it was pretty strong back then too, so maybe you have

that to try to offset it somewhat. But I mean, we we've we've got a supply cycle going on right now. We haven't had seen one of these outside of memory in a long long time. But you you can believe that and be be nervous about the neartive medium from cyclical and still have a positive long term view in terms of like secular growth of the industry. They're not mutually exclusive. Well, just stacy any other big sort of

thoughts things that we should watch for next. I mean, you mentioned the Intel Analyst day, you know, like what else is on your radar? We we should do like a whole one of these calls somebody just probably on semicap on way for fabrication equipment. That's a whole other part of the industry, right, Yeah, and I want to do one on you know, the one that we never did in the original series was the SML uh and so maybe we got at some point we got to

do that one too. That's like the one big company we've never really I would I would be thrilled, Yeah, I would be thrilled. I don't cover a SML. I have a colleague amend that is, but we can talk about it. And like the semiicap industry in general, again, it's it's even farther back than this supply since you

do get you get cicklicality there. But again like that, that's another one of these areas like long term I'm I'm like that that long term secular story on semicap capital intensity going up, which has implications i'm across the value chain. Um, I think is hugely is hugely interesting. That'll be uh, that'll be the next one we do. You you let me know when I'll be there. We can talk about it. Sounds good, Stacy, Thank you so much for coming back on our lot. You met my

pleasure anytime. That was great, Thanks Stacy, Tracy. I always like talking to Stacy obviously, you know, I think one of the interesting things that you know, he pointed out which I hadn't really thought of or appreciated before. He's like, just how far deep in the cycle the chipmakers are and how little visibility they have into and demand and so on top of everything else, you can really see why so deep into this crisis, things aren't really smoothed

out yet. Yeah. Um, And also of course now you have this issue of double ordering and how much of the demand is real versus people stockpiling. It feels like that's just going to cloud it up and make it much more difficult in the future. And you know, it kind of reminded me of um, this is very like

add lots stuff. But it reminded me a little bit of the corporate bond market, where when there's a big sale of like a bond that everyone wants to get, people normally put in like padded orders so that they can get quite a lot. So you know, they might not actually need five million or something like that, but they'll put in a massive order hoping that they get

some of that. You know, I kind of wonder like maybe that started because there was one really hot deal and then it just became normal behavior in the corporate bond market. I kind of wonder if this is a permanent shift for customers who are ordering semiconductors. Yeah, you

should write about that, Tracy. That's very like int essential Tracy analogy, the connection between the bowl whip effect and semiconductors and um book building in the big corporate concept you got you gotta I think that like I'm imagining the ven diagram of people who read about semi conductors and corporate contessential Tracy. But no, I mean I did

think that was really interesting. Also, like this idea that like you know, there used to be UM free cancellations or the idea that you know, and also that the manufacturers then try to game it the other way, so that if you know, if a client makes a hundred million dollar order, they might only make fifty million on the assumption that this is really just a fifty million dollar order in disguise, And so yeah, you can see why that on top of everything else, and then of

course the emergence of the delta variant, the fact that chips crossed so many borders during their manufacturing just for like the production itself and packaging and put in component. I'm not surprised or recording this septemb that we're still

seeing so many issues. M I mean, one thing I will say is that I think the virus situation is improving in Malaysia, so maybe that will help and maybe at a minimum, as these sort of delta outbreaks start getting under control in Asia, hopefully that will allow people to see how much of the current tightness in the market is driven by COVID disruptions versus the bull whip effect UM that's been ongoing for like more than a

year now. Yeah, exactly right, well, we definitely got to get Stacy back or for the semicap a SML episode, and um, you know this story is not over yet. No, it definitely isn't. All right, shall we leave it there? Let's leave it there. This has been another episode of the ad Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wiesenthal. You can follow me on Twitter at the Stalwart. Follow our guest on Twitter, Stacy Raskin. He's at s Raskin.

Follow our producer Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levi at Francesca Today, and check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.