Chip plants run 24 hours a day, seven days a week. They do that for one reason: cost. Building an entry-level factory that produces 50,000 wafers per month costs about $15 billion. Most of this is spent on specialized equipment—a market that exceeded $60 billion in sales for the first time in 2020.
Three companies—Intel, Samsung and TSMC—account for most of this investment. Their factories are more advanced and cost over $20 billion each. This year, TSMC will spend as much as $28 billion on new plants and equipment. Compare that to the U.S. government’s attempt to pass a bill supporting domestic chip production. This legislation would offer just $50 billion over five years.
Once you spend all that money building giant facilities, they become obsolete in five years or less. To avoid losing money, chipmakers must generate $3 billion in profit from each plant. But now only the biggest companies, in particular the top three that combined generated $188 billion in revenue last year, can afford to build multiple plants.
Semiconductor factories are largely automated so they were not particularly impacted by the global lockdowns. Demand for their products surged during the lockdowns. Factories running on thin margins and under constant threat from obsolescence do not operate with a lot of spare capacity. That is the primary reason we now have a semiconductor availability issue. The demand curve has accelerated well above the ability of supply to keep up. The increasing dependence of the automotive sector on chips has been building for a while and will contribute to the investment case for more supply.Click HERE to subscribe to Fuller Treacy Money Back to top