Semiconductors and the U.S. Economy: Past, Present and Future
December 2nd, 2021 | Posted in Investing
What Semiconductors Say About the U.S. Economy’s Past, Present, and Future
Chips are everywhere these days. It’s not just computers and iPhones that have semiconductor chips – it’s also coffee makers, washing machines, refrigerators, new cars and trucks, even dog grooming machines. Chips make everyday products and gadgets “smart,” and there are a lot of smart products.
Many readers have likely seen the news lately on semiconductors – there is a global supply shortage, fueled by high demand, snarled supply chains, labor shortages, high shipping costs, and jammed ports. But the semiconductor shortage also reveals something about the U.S. economy many people didn’t realize before: the United States designs many of the latest, most cutting-edge chips, but we don’t have the ability (at least right now) to manufacture them. Why is that?
It starts with the past, and a big part of the story centers around a single engineer named Morris Chang. In the 1970s and 1980s, many semiconductor-makers designed and manufactured their chips. Semiconductor fabrication plants, called “fabs,” were part of the broad semiconductor business, all happening under one umbrella. This setup changed in the mid-1980s, with many factors ultimately separating chip design from chip fabrication.1
A better way forward for passive investors.
Passive investing using ETFs has become popular, allowing virtually every investor to participate in the stock market with an ETF index fund that tracks the S&P 500. Unfortunately, these funds make it difficult to beat the market—because an index fund essentially is the market.
Zacks Advantage offers a better way forward: We have always been committed to a research-driven investment process, and we have refined our active investment experience to optimize the passive investment realm. Our actively managed robo advisor offers:
- Targeted asset allocation
- Automatic diversification
- Built-in discipline
- Simplified investing – with low fees!
Learn more with our free guide, A Better Way Forward: Actively Managing Passive Index Funds.2
In 1984, Mr. Chang was a rising star at Texas Instruments, and he was known for driving efficiencies in manufacturing and operations. At some point, however, he realized he was not going to land the executive role he wanted, and shortly after he left the company, he was recruited back to Taiwan to head the Industrial Technology Research Institute. It was there Mr. Chang saw the massive opportunity for technology companies to outsource their manufacturing needs to Asia, and in short order, he formed the world’s first and now largest silicon foundry (“fab”) – the Taiwan Semiconductor Manufacturing Company. Investors who pay close attention to companies know: Taiwan Semiconductor is the preeminent chipmaker.
The degree of separation between the U.S. and Asia’s ability to manufacture semiconductors has been widening ever since, and the global semiconductor shortage has resulted in a reckoning that many argue rise to the level of threatening national security.
Fast-forward to the present, and investors can see the U.S. shifting focus to the manufacturing of semiconductors domestically. In June, the U.S. Senate voted in a bipartisan manner to approve $52 billion for new semiconductor “fabs,” but the question remains whether the U.S. can catch up to East Asia. The U.S. still leads in inventing, innovating, and designing new technologies, it’s just not able to manufacture them as East Asia can. For example, the U.S. pioneered the development of photovoltaic solar technology, but China manufactures most of the panels. Similarly, U.S. companies haul in half of the world’s semiconductor revenue, but only manufacture 12% of its semiconductors.
What’s Happening in the Semiconductor Markets Now?
Demand for semiconductors has been strong for years, but very recent data from three major chipmakers might suggest a soft patch is looming. Texas Instruments, for instance, sells very common chips that go into products across virtually every sector of the economy, from autos to consumer electronics. But in its most recent earnings report, Texas Instruments said it was expecting lower than expected earnings from chip sales than expected in Q4, while also noting that customers were asking for fewer “rush deliveries.”
Then there is hard-drive and flash memory maker Western Digital Corp and memory-chip maker Micron Technologies. In both companies’ Q3 earnings reports, they provided lower-than-expected sales outlooks for the final quarter, which is meaningful given they provide lower-end, commodity-oriented chips that go into the myriad products alluded to earlier. Both companies cited supply shortages – not shifting demand – as reasons for weak earnings expectations. But lower overall activity, coupled with falling prices for memory chips, has led some to wonder if we’re at or near a cycle peak for chips.
We are not convinced. We think falling prices for memory chips are likely connected to supply issues becoming resolved, and we would also note that companies have increased investment in production capacity. If the market expects higher future supplies of chips, that can result in easing price pressures today. As far as fewer customers asking for rush deliveries in the case of Texas Instruments, it may just be that companies are responding to the already high levels of backorders.
Not all chipmakers have seen softening activity, either – higher-end chipmakers like Nvidia are seeing very robust activity for complex graphics chips that drive gaming and A.I., and Advanced Micro Devices has been selling its server processors very well.
Bottom Line for Investors
We looked at what semiconductors can tell us about the U.S. economy’s past and the present. What about the future?
The U.S. is investing in bringing semiconductor production back onshore, but some contend that the investment is coming too late – the sheer pace of technological advancement in semiconductors may deem manufacturers in East Asia, like Taiwan Semiconductors, too far ahead. Time will tell, but there is little doubt that demand for semiconductors and advancements in the industry will drive innovation for the foreseeable future. The question of who will own it remains to be seen.
In recent years, passive investing has become a popular approach, allowing virtually every investor to participate in the stock market with an ETF index fund that tracks the S&P 500.
However, a purely passive approach cannot beat the market (because it basically is the market). That’s why Zacks Advantage offers an actively managed robo advisor that:
- Invests exclusively with ETFs
- Uses technology to recommend the appropriate mix of equities and bond ETFs to help achieve your investing goal and specific risk tolerance
- Lowers fees and expenses
Get our free guide, A Better Way Forward: Actively Managing Passive Index Funds, to learn the 4 issues that can hold back returns for passive investors, and how Zacks Advantage can help you overcome them.
1 Washington Post. November 4, 2021.
2 Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.
3 Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss
Zacks Advantage is a service offered by Zacks Investment Management, a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. All material in presented on this page is for informational purposes only and no recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. Nothing herein constitutes investment, legal, accounting or tax advice. The information contained herein has been obtained from sources believed to be reliable but we do not guarantee accuracy or completeness. Zacks Investment Management, Inc. is not engaged in rendering legal, tax, accounting or other professional services. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney- client relationship. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel.