CHIP INDUSTRY in the "pig cycle"?

Chips are omnipresent in everyday life, even if you don't see them most of the time. They are definitely indispensable today and have long since been installed in more than just computers. Derived from the English word usage, "chip" means nothing more than "splinter" or "chip", just like the popular "chips". In the technical world, it usually refers to a semiconductor wafer on which the integrated circuits are mounted. Because semiconductors are the basic material of a chip, the two terms are used interchangeably. As complex as the tiny wafers are, their raw material - simply put - consists of sand... more precisely, quartz sand, which contains the silicon needed for microchip production in the form of silicon dioxide. The development of thin semiconductor wafers, also known as "dies" (matrix, stamp, cube, mold, punch), from the early 1970s onwards, can or must be clearly classified as a quantum leap in technology; just think of the previous tube processors, for which entire rooms and switch boxes had to be built. So let's praise today's microprocessor, the clocked, register-based and digitally integrated circuit, which processes binary data according to the instructions contained in its working memory and outputs them again in equally binary form. In addition to the microprocessor, there are other processors, such as network, graphics and sound processors. The basis for the production of microchips is then formed by so-called wafers, square or circular discs, depending on the area of application, which are obtained from a mono- or polycrystalline blank. This is a simplified, brief outline of the "chip"; to understand everything, you would probably have to be able to be present live at a production process.

Our digital everyday life is impossible without chips and the entire world economy is therefore heavily dependent on this "tiny device". Virtually in every technical device, from the oven to the washing machine, to the most important chip carriers, e.g. the computers, smartphones, 5G, artificial intelligence, robots, medical instruments, Internet of Things (IoT) and the electric car. For example, how many semiconductors are built into a conventional car (gasoline or diesel) for propulsion, handling, airbags, etc.? In an average vehicle, there are a good hundred components "populated" by semiconductors. The "frightening" increase follows on the heels: electric cars allegedly require (according to estimates) ten times as many chips as gasoline or diesel engines! Oops, there is still a lot to come for us and the chip industry. And that's why supply chains are of enormous importance today and in the future. But the demand for chips has been so great since the beginning of 2021 that many manufacturers can no longer supply enough. Added to this are the unspeakable geopolitical tensions that have led to export restrictions, especially between China and the USA. And unfortunately, there are only a few relevant countries in the chip market... Taiwan, USA, South Korea, Japan, China and a few suppliers in Europe. Despite the high importance of chips and recognizably high future potential, the shares of weighty semiconductor manufacturers have dived by up to -50%. This is probably related to the "pig cycle", among other things: An excessively large supply is followed by a reduction in production, which in turn leads to a shortage with a subsequent increase in capacity. For example, INTEL - which brings us to our new recommendation (p. 9) - has massively increased investments and started building a plant in Ohio (of two); in parallel, the construction of a larger production facility in Magdeburg (FRG) is also underway. Furthermore, the Israeli chip manufacturer Tower Semiconductor was purchased for USD 5.4 billion. But does this calculation add up? Semiconductor production facilities are very cost-intensive, especially since they must necessarily be state-of-the-art. Will INTEL be able to smooth the "hog cycle", i.e. the fluctuation between oversupply and shortage, nevertheless or even more so? We think that the Americans in general and INTEL in particular are very forward-looking; at the very least, the example of e-cars mentioned above alone speaks in favor of massively higher capacities. In the case of the U.S., there is also the fact that it wants to reduce its dependence on China in various areas... perhaps even has to. This is probably why US President Joe Biden has launched an unmistakable investment offensive: Washington wants to provide around USD 50 billion as part of the infrastructure programs and thus subsidize the construction of new semiconductor factories. Actually, this should also play into INTEL's cards, but opinions differ here, especially since the recipients are prohibited by law from increasing the production of highly developed chips in China over the next ten years. Does this eternal interventionism really make sense, or wouldn't it be much better to finally let the free market "play" again? We plead for the latter and rather keep it with the quote of Ludwig Erhard: "The freer the economy is, the more social it is, and the greater economic benefit will be achieved!"

But back to the chip industry. The Asians are also practicing activism, because, conversely, they by no means want to give up the U.S. market... and so the world's largest chipmaker Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung have decided to spend several billion to expand capacity in the United States. In addition, India is offering the companies more than USD 1 billion if they build chip factories directly in India. As you can see, there is a lot going on in the chip industry. In total, the global chip industry is expected to break the USD 500 billion revenue mark as early as this year (in 2015, it was USD 275 billion). By 2030, it is expected to reach USD 1,000 billion, i.e. a doubling every 7 years! For the time being, however, there are increasing signs that demand is declining. According to estimates, global PC production, for example, is expected to decline by -9.5%. The smartphone market is also going through a bumpy ride, with the recessionary tendencies making themselves felt...

The question remains as to how much of the negative facts are already reflected in the share prices. We believe in the general and future potential of the indispensable chip industry! Furthermore, we prefer buying at (supposedly) low quotations ("dusting off") and subsequently see a good "buy and hold potential". Unfortunately, the previous positions in AMS and VAT (report on page 2) are still some way away from a positive performance; however, the qualities continue to convince us. You will find first facts and arguments on our new recommendation INTEL on page 9!