THE SEMICONDUCTOR STORY
Semiconductors: The Window into Global Economic Activity
At $300B, the semiconductor business is interesting but hardly a show stopper. Although critical for a handful of countries, it's barely 3% of global manufacturing. But as a proxy for the $2T high tech equipment market as well as a major component in consumer, industrial and military devices, semiconductors are the best window into US & global economic activity.
There are at least 2 reasons why you should care about semiconductors:
- Opportunities to trade a drop in semiconductors (and high tech)
- Great track record for predicting economic activity
The story of semiconductors: a story of concentration
Concentration in Manufacturing:
Regional: 7 Countries (EU counted as country for simplicity) manufacture 97% of world's semiconductors
Corporate: 25 companies manufacture 70% of all semiconductors
Sector: contract manufacturing concentrated in Taiwan, Auto sector concentrated in Germany (25%), Memory in Korea and Japan
Concentration in Exports:
A downturn in high tech is devastating for many countries
A very open club
APAC very exposed: semiconductors drive 23%+ of total manufacturing exports
Most OECD countries exposed: This is a sample list only; complete list includes other OECD countries like Denmark, Israel, etc.
Early & accurate visibility to macro trends
If you need to know about
- specific market sector trends (autos, computers, defense, and so on)
- economic activity (consumer spending, Business investment)
- Global and Regional GDP
then you want to watch semiconductors.
The broad use of semiconductors, the specialization and concentration, and the upstream position early in the production cycle are just some of the factors that contribute to semiconductors' early and accurate visibility.
The Semiconductor Downturn
The semiconductor market doesn't slowdown - it melts down.
In the rollercoaster ride of a boom-bust cycle, the contractions are sudden and severe - once contraction starts and annual growth turns negative, the supply chain cuts excess fast. The bottom comes within 2 quarters. The limited number of players (manufacturing in just 7 countries & by 25 companies) combined with short manufacturing cycles and just-in-time production facilitates a streamlined supply chain. That in turn enables a rapid response.
And producers are very motivated to respond quickly. Unlike auto tires which sit on shelves without a loss of value, semiconductors are obsolete and value-less within a few quarters.
Semiconductor year-over-year sales demonstrate strong correlation as a leading indicator for GDP. Prior to the dotcom boom, semiconductors concentrated in computing. Post-dotcom bust (2001), semiconductors can be found everywhere, even in greeting cards and teddy bears.
