Inflation – Why it’s good for Semiconductors
G. Dan Hutcheson
The Chip Insider®
Price inflation is something one hears about almost every day. Running in the high single-digit range in most large countries, its impact reverberates up and down the semiconductor supply chain on a daily basis, as supply chain managers try to find cheaper alternatives and senior managements hold cabals with sales and marketing over when, how, and where to raise prices. The short-term disruption is clearly bad. But the long-term gains to be made, once the short term is adjusted for and new business models emerge, will be great for the winners who prevail over the challenge.
A strategic inflection point similar to that reached by the auto industry in the mid-1920s – something my father and I predicted would eventually happen in a 1996 Scientific American article titled, “Technology and Economics in the Semiconductor Industry” is happening today. Around 10 years ago I wrote Chip Insiders with predictions of manufacturing costs starting to rise significantly in the early 2020s if the industry failed to execute on 450mm. That said, it’s clear to everyone tat real productivity gains in fabs are not keeping up with rising manufacturing capacity and fab costs. Hence the need for a profitable reversal in the roughly 20-year decline in ASPs. This is most apparent in DRAMs, which have faced the storms slowing shrinkonomics the longest, they have been able to systematically raise revenue-per-square-inch of silicon produced. And they have been profitable while doing it.
The Opportunities: So what’s good about the inflation conversation in the overall economy, is that it provides a smoke screen to ease the markets to an inflationary future. Whatever happens tactically across these markets, the strategic message is clear: semiconductor inflation is here to stay. To paraphrase Falstaff in Shakespeare's The Merry Wives of Windsor “The world is semiconductor’s oyster, which with fab will open.”