February 5th, 2022

Will semiconductor shortages tank the economy?

Dear Retail Investor,

I always wanted to be a travel writer.

Once I even churned out a 150,000-word manuscript about my misadventures in South Asia.

But all I got from that effort was a wastebasket full of rejection letters.

(Sigh…)

Yet today I am a travel writer… just not the kind that chronicles foreign escapades.

Instead, I compose articles about the markets from wherever I happen to find myself.

I’ve written from Aruba… South Africa… Spain… the UK… Morocco… not to mention from all over the U.S.

What makes this globe-trotting lifestyle possible?

Semiconductor chips.

Sure, the Internet and cell phones allow me to work when I’m away from home.

But without semiconductors, those tools couldn’t exist.

In fact, semiconductors are at the heart of just about every industry you can think of.

From telecom to healthcare… autos to aerospace… computers to smart grids… and everything in between…

Not to mention emerging industries like cloud computing, 5G wireless and artificial intelligence…

They all rely on semiconductors.

So why are they so important?

Because they control electrical currents that allow devices to perform incredibly complex functions.

The semiconductor sector is growing like crazy

It’s been doing so for decades.

In fact, the worldwide semiconductor market size has increased from about $33 billion in 1987 to an estimated $553 billion in 2021.

That’s an increase of 1,575%.

semiconductor market size

By the end of 2022, the Worldwide Semiconductor Trade Statistics Organization estimates that figure will grow to $601.5 billion.

And by 2030, Precedence Research says it’ll hit $808.5 billion.

What’s driving this growth?

Plenty.

There’s the insatiable consumer appetite for smartphones, laptops and other electronic devices…

Industrial demand for special tools and equipment…

Demand from the automotive industry for computer boards that control so many automotive functions…

Communications industry demand for cell phones, the Internet and computer networks…

I could go on, but you get the picture.

Unfortunately, there’s a big problem in the semiconductor industry

This past summer, I took my car to a mechanic. He told me that I’d probably have to get a new HVAC system soon.

When I asked how long it would take to order one, he laughed and said, “Who knows?”

Turns out these HVAC systems were on backorder due to a shortage of semiconductor chips.

You’ve no doubt heard about this global semiconductor shortage.

It’s hit the auto industry especially hard.

According to business management consultant AlixPartners, it cost the industry 11.3 million units of production in 2021.

That translates into $210 billion in lost revenue.

The root of the problem, of course, was the pandemic lockdowns.

Back in March 2020, all those lockdowns forced the auto industry to shut down plants and temporarily halt orders from semiconductor suppliers.

At the same time, the electronics industry faced a spike in demand for cell phones, TVs and computers from people forced to stay at home.

So chipmakers rerouted chips that would have gone to the auto industry to electronics manufacturers.

They also ramped up production of special chips the electronics sector uses.

A few months later, the auto industry came back online and started ordering semiconductors again.

But chip makers couldn’t fulfill those orders very well due to the demand from electronics manufacturers and other industrial sectors.

That inability to meet automotive demand still exists (not to mention demand from many other industries).

Bottom line – the U.S. is too reliant on Asia for semiconductors

In 1990, the U.S. accounted for 37% of worldwide semiconductor manufacturing.

Now?

Just 12%.

The reason for this drop-off is simple.

Asian governments have invested aggressively in chip manufacturing incentives… while the U.S. has not.

Today, two Asian companies dominate the global semiconductor industry – the Taiwan Semiconductor Manufacturing Company (Nasdaq: TSM) and the Samsung Electronics Company (005930.KS).

The Biden Administration sees Asia’s dominance in semiconductors as an unacceptable threat to the U.S. economy.

That’s because it fears a disruption in Asian chip production could cause massive layoffs throughout the U.S.

The problem is there’s a low inventory of semiconductors in America.

According to the U.S. Commerce Department, we averaged less than five day’s worth of inventory during 2021.

That’s down from an average of 40 days in 2019.

So if our supply of semiconductors were cut off for a while, there would likely be a lot of people out of work until supplies resumed.

The Biden Administration sees government investment in domestic semiconductor production as the answer to this problem.

That’s why it wants to invest $52 billion in this effort.

If lawmakers pass the CHIPS for America Act, that investment will happen.

In June 2021, the Senate approved this legislation, which is currently being debated in the U.S. House of Representatives.[DF8] 

Some U.S. chipmakers aren’t waiting for lawmakers to act.

Take Intel (Nasdaq: INTC).

The chip giant sees exploding semiconductor demand as a huge opportunity.

The company says it will invest another $20 billion in a new chip plant in Ohio.

Micron Technology (Nasdaq: MU) is also getting in on the act.

That company said it’ll spend $150 billion in chip manufacturing and research and development over the next decade (but not all of it in the U.S.).

What retail investors can do to take advantage of semiconductor industry growth

With record demand for semiconductors…

And the current supply crunch of semiconductors…

And with governments and chipmakers throwing hundreds of billions of dollars into ramping up semiconductor production…

There’s obviously money to be made investing in semiconductor manufacturers and the companies that serve them.

Of course, we retail investors don’t want anything to do with Intel and its ilk – they’re too damn big.

What we do want are sound small cap companies that are under Wall Street’s radar.

One possibility is Camtek (Nasdaq: CAMT).

Camtek is  a $1.47 billion Israeli company that manufactures metrology and inspection equipment for the semiconductor industry.

This company’s track record of profits is impressive, as over the last five years it’s gained 61%.

And in 2021, it shot up 111%. 

Another company worth a look is Axcelis Technologies (Nasdaq: ACLS).

This $1.96 billion outfit is based in Massachusetts, where it designs, manufactures and services ion implantation and other processing equipment used in semiconductor chip fabrication.

Like Camtek, it’s doing quite well for itself, as it gained a whopping 161% in 2021. 

There are many more potential small cap plays that could put you in position to profit from semiconductors.

Perhaps I’ll expand on them the next time I hit the road.

That’s it for this missive.Until next time, 

Doug Fogel
Contributing Editor, Dear Retail

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