The Chip Insider®–Cyclical History of the Semiconductor Industry

Summary: A Cyclical History of the Semiconductor Industry: With the US-Isreal war with Iran, the closure of the Hormuz strait, the resultant surge in oil prices, and rumors the White House wants to regulate foreign sales of chips … one must ask if there’s an industry recession in the cards. I know you’re worried about this, so let’s look at the past to have some idea of what the future may bring. One can hope the war is short, oil prices come down, and the White House retreats… But early projections for a war’s length are invariably too short... hope is not a strategy. The good news is that war has seldom created silicon cycles. But peaking old prices and… even more so… sour economies have.

The Silicon Cycles: There have been 14 recessive growth periods since the Integrated Circuit market emerged in 1963. That’s an average of one every 4.4 years… In general, cycles have become more frequent… At the same time, the swings have become less severe. The overall average has been -8% for Semiconductors and -20% for Equipment... After 2010, it calmed down… Don’t assume the recent calmness is due to structural change … There’s an old saw about when the economy gets a chill, electronics gets a cold, semiconductors get pneumonia, and the equipment industry dies… the greater cyclicality of equipment is theoretically due to its… being on the second derivative of the economy. This can be seen by the fact that 100% of the cycles have been led by a slowing in the second derivative of world PPP GDP…

Boom-Busts: There is a general belief that excess spending on capacity in the years prior to a downturn is the primary cause of the severity of silicon cycles. While conceptually, this makes sense, the actual correlation is poor... The gap is largely explained by availability and confirmation bias. The reason why the correlation between spending excesses and downturns is low is … Downturns are not caused by excess spending on the supply. They are caused by the long lags between capacity spending and output complicated by unexpected short-term swings in demand. The triggers are invariably on the demand side. And as Yogi Berra put it, “Forecasting is difficult… Especially when it’s about the future.”

Causality: If you look at the details of each cycle, there are many conclusions that can be drawn. Most important is the coincidence of external events and technology peaks or the lack thereof… It’s also clear that every cycle is fundamentally different. Just not in the ‘This time it’s different’ way of thinking that arises before a downturn. Never enter a downturn with wishful thinking and cognitive dissonance.

“Those that fail to learn from history are doomed to repeat it.”
— Winston Churchill