A Few Hundred Billion Dollars Won’t Fix The Chip Shortage

After US and EU, Japan has announced big capital investment in semiconductor industry As part of a larger economic relief package of 55.7 trillion yen ($488 billion). All told, this year and next year, the total outlay could be closer to $200 billion, according to analysts at Jefferies. As of now, the allocation of funding has been largely unclear, but much of it is being directed towards future technology, which aims to fund the construction of vast parts of the semiconductor supply chain.

While this is plausible, it does not – and never will – solve the current problem. Such large, non-concentrated public allocations are spread all over, ultimately hindering real technological progress. Beyond that, the drawbacks we’ve been hearing about are mostly for older chip technology, which have been well documented.

In the case of Japan, a substantial portion of the $6.8 billion earmarked for the chipmaking industry will be distributed under the newly established New Energy and Industrial Technology Development Organization. In its strategy document for the industry, the government notes that it is striving to promote state-of-the-art logic semiconductors used in various electronic systems, introduce domestic manufacturing with “next generation” technology, and introduce “devices”. and material’s choke point technologies”. Will support the global semiconductor supply chain.

Here’s the thing: These are not areas that need help. Consider semiconductor production equipment, or SPE, the machines used to make chips. There is no point in funding this sector in cycles at this point in time. It takes up to three months to make chips, whereas these machines take longer to make. Meanwhile, the industry is extremely cyclical, there has always been a structural crunch and 80% of it is concentrated with only a handful of players. This means that by the time they’re all in sync, we’ll either end up with more capacity or don’t have the right kind of machines for the chips we need.

Ever since the shortage has occurred, the demand for SPE machines has grown rapidly. According to Nomura, North American billings, a proxy for demand, rose 36% in October from a year earlier, and rose 38% in the previous month. In fact, analysts raised their growth estimates from 35.4% to 39.5%, with total appliance sales approaching $100 billion this year.

Japan is home to some of the global leaders including Tokyo Electron Limited and Screen Holdings Co. Their income continues to increase along with orders. That’s because initially, when there were clear signs of shortages, chipmakers began ordering more machinery that always ran on a carefully calibrated balance. SPE manufacturers have ramped up production capacity and some have noted that they are not running up against issues that would stall their shipments. Their exports are also increasing continuously. At present, the subsidy given to these manufacturers will not be of much benefit. In fact, chip-related companies in Asia are now in an optimistic tone, said Sanjay Mehrotra, chief executive officer of Micron Technology Inc., recently as the global semiconductor crisis is looming.

It’s worth investing in for the future, no doubt about it. However, if governments do not target sectors that are actually sources of bottlenecks, or that are technologically lagging, it goes wrong. In fact, given the rate at which industrial technology is developing, fresh funding should increasingly be targeted towards areas that lie beyond the leading edge, close to the bleeding edge.

As policymakers react to the nearly year-old shortfall, a reassessment for the future needs to happen now. Without it, it would not be surprising to see shortages and shortages of critical industrial parts in the future.