Moody's: rising barriers to entry in the chip industry global government participation helps to balance supply

Tioui (Timothy Uy), deputy director of Moody's Analytical (Moody's Analytics), said recently that the manufacturing of semiconductor chips is a capital-intensive and complex process, and with the acceleration of the replacement of the new generation of chips, the industry's barriers to entry are rising, which may lead to a long period of supply tension in the industry, while the participation of global governments in the industry will help to balance supply.

The importance of chips to the electronic manufacturing industry is self-evident. It widely exists in computers, smartphones, video game consoles, refrigerators, washing machines, alarm clocks, and even cars and other products. At present, the world is in a shortage of chips, and there is no relief.

"I think the real main question is that [chip] supply is difficult to keep up with and the surge in demand will not play any role in the short term," Wui said in a recent interview. "

Chip industry insiders and some institutions believe that the chip shortage may last until 2023.

Barriers to entry are rising

'Semiconductor chip manufacturing is a capital-intensive and complex process that often takes weeks to produce, 'Mr. Wui said in a report last week. Distribution takes longer.

He explained that new supplies could not be achieved overnight and could sometimes take years because of the need to build new plants and equip them with the right technology. In addition, the capital-intensive nature of semiconductor manufacturing is concentrated in the hands of a few companies, and the barriers to entry of new companies are also raised with the change of a new generation of chips.

The production process of each generation of semiconductor chips is different. Mr Wui says the higher profit margins of the new generation of chips give major chipmakers more incentive to invest in the new generation of chips rather than the older generation.

This, he explains, is part of the reason why the auto industry is in trouble. Compared with the demand for a few of the latest chips for smartphones and other devices, the thousands of chips needed by the automotive industry are older chips.

Government intervention

Li Xiujun, vice president and senior credit rating director of Moody's Credit Strategy and Standards Department, said: "all developed economies around the world, including the United States and the European Union, have drawn up plans to increase domestic semiconductor industry capacity."

At present, governments have promised to increase capital expenditure on chips to improve local chip manufacturing capacity. For example, South Korea plans to spend about $450 billion over the next decade to build the world's largest chip manufacturing base, the United States plans to provide $52 billion to support the chip industry, and the European Union is prepared to invest a lot of money to expand EU semiconductor manufacturing.

Wui believes that government involvement can help ease the pressure on some chip shortages, especially the price of storage chips, because the supply of such chips is mainly dominated by a few companies.

Mr Wui said that once the government "put in place basic subsidies and provided a lot of indirect support to local small businesses to participate in the manufacture of low-end chips, the supply of chips will basically increase". He also believes that this may ease the shortage of chips for carmakers.