The semiconductor industry isn’t spending big on rare old-tech chips

According to tech-market researcher Gartner Inc., global chip makers are projected to invest about $146 billion in capital expenditure this year, about one-third more than last year and 50% higher than pre-2019 . This investment is more than double the industry spend five years ago.

But Gartner estimates that less than $1 out of every $6 is earmarked for so-called legacy chips, which are facing the longest backlog right now.

The small investment demonstrates how rare chips—many sold for only a few dollars—are made with older technology and equipment that requires less money to buy. But it also shows that many semiconductor makers are cautious about placing multibillion-dollar bets on essential chips given the risk of lower profits and a slump in demand.

Gartner says the three firms—Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co. and Intel Corp.—account for about three-fifths of all 2021 spending. Almost all are moving to the new capability of chips built on cutting edge technology, which is quite plentiful.

According to industry analysts, the direction of spending means an increasingly tight supply of run-of-the-mill chips used in cars, home appliances and gadgets. It also suggests that the wait for orders may be longer, he says.

The mismatch reflects an imbalance in the world’s chip-supply problem: Not all chips are created equal in the $464 billion semiconductor industry.

The difference in financial rewards between the two worlds of chip production, new and old, is clear. According to Bain & Co., a management-consulting firm, a 5-nanometer wafer for advanced chips — which allow apps to run on the latest smartphones like the iPhone 13 — sells for about $17,000 this year. This price compares with about $3,000 for a 28-nanometer wafer for “legacy” semiconductors that perform simple tasks like connecting devices to Wi-Fi networks.

The semiconductor world classifies itself by nanometers, or the size of the transistors used for production. The smaller the transistor, the newer and more advanced the process technology, and the greater the number of chips that can be made on a single silicon wafer. Chips made using the 28-nanometer process or larger are generally considered legacy chips, with higher numbers indicating older technology. Chips made using small-nanometer processes are viewed as advanced, with the most state-of-the-art chips produced on single-digit nanometer processes.

Companies around the world in various sectors have begun a “red-hot capex cycle”, driven by an economic reopening and rebounding consumption, according to Morgan Stanley estimates. Global investment will return to pre-pandemic levels this year and surpass them, Morgan Stanley says.

But no industry is accelerating investment like chipmakers right now. Of the 20 industries with the largest capex outlays, based on an analysis by S&P Global Ratings, the semiconductor sector’s year-over-year jump in capital expenditure is the biggest at 32% this year — nearly 2.5 times the average. The world’s 2,000 largest non-financial public companies.

Spending on the semiconductor world’s advanced chips is often planned and executed in close coordination with the needs of buyers. “They’ve generally done a good job”, historically, said Christopher Taylor, a director of market-researcher strategy analytics that focuses on the technical components.

The uptake refers to how much it costs to produce the next generation of semiconductors. A chip-making plant or fab can cost up to $20 billion.

Setting up a “clean room”—to ensure the chips remain free of impurities—could cost half a billion dollars. A single photolithography machine, which prints chip designs onto a silicon wafer, could net up to $150 million. Even process-control devices can total $10 million each. The latest advanced fab can have hundreds of such machines.

Manufacturers of semiconductor equipment are thriving. Lam Research Corp., a Fremont, California-based firm that makes wafer-processing equipment, has reported six straight quarters of record revenue. The Netherlands-based ASML Holding NV, the only manufacturer of the industry’s most advanced lithography equipment, is fully booked by early 2023.

“I wouldn’t think of it as a pinnacle,” ASML chief executive Peter Wenink said on a recent earnings call. Sales could increase by 2025, he said.

Going forward, restricted bets on the hardest-hit types of semiconductors mean that the world’s legacy-chip supply will not catch up to projected demand through 2024, Counterpoint Research, a techno-market researcher, estimates.

Many legacy-chip makers are hesitant to make large investments for new capacity because by the time a new factory starts production in a few years, there may not be equal demand, resulting in underutilization and loss of plants. . “If you think about the oversupply, it’s pretty scary,” said Dale Gai, Taiwan-based research director at Counterpoint, which focuses on semiconductors.

In addition, a new factory for older-technology chips, such as a 28-nanometer facility, would initially be short of money due to upfront costs and low production yields – some of the biggest competitors, years old factories with efficient depreciation machinery. will not face operating cost structures, said Peter Hanbury, a partner at Bain that specializes in semiconductors.

Taiwan-based United Microelectronics Corp., a major producer of the world’s older chips, has noted how such market considerations make it challenging to expand capacity for older-technology chips built on 8-inch and 12-inch wafers. Huh.

“If the economics remain the same, it will be very difficult to get a reasonable return on investment,” UMC co-president Jason Wang told investors in July.

Government subsidies may play a role in motivating chip makers to build new plants, but they are focused on next-generation chip technologies. In June, the US Senate approved $52 billion in funding to support semiconductor research and production, but only $2 billion was earmarked for legacy chip production.

Some older chipmakers are ramping up investment to a level they say reflects a prudent response to demand. UMC has pulled the trigger for a $2.3 billion expansion this year — but only after securing advance bookings from customers and locking in pricing. According to Gartner, two auto-chip players, STMicroelectronics NV and Infineon Technologies AG, plan to invest $2.1 billion and $1.2 billion, respectively, this year for capacity expansion. Texas Instruments Inc., which makes analog chips for automotive and industrial applications, has spent $1.2 billion in capital expenditures as of the end of September this year.

Still, many legacy-chip makers are inclined to hold on to bigger bets because “rational capacity” is a principle that has shaped the industry for decades, said Bain’s Mr. Hanbury. “The last thing you want to do is spend billions on a new plant and not load it” with orders, he said.