The Semiconductor Cycle
Chip demand is volatile and new capacity takes years to build. That mismatch creates a repeating cycle of shortage and glut.
Why this matters for beginners
Semiconductor results swing hard in both directions. Understanding where a company sits in the chain explains why its profits behave as they do.
Main explanation
Designers create chips but outsource production. They carry lower fixed costs and depend on intellectual property and customer relationships.
Manufacturers own extremely expensive factories. Their profits depend on keeping those factories full, which makes them far more sensitive to demand swings.
Equipment suppliers sell the machines used to build the factories. Their orders arrive early in the cycle and can fall sharply when customers pause investment.
Capacity takes years to add, so shortages last long enough to trigger heavy investment, which then arrives together and produces oversupply. The cycle repeats.
Example using a real company
During a shortage a manufacturer runs its factories at full capacity with high margins. Two years later new plants open, prices fall, and the same factories run below capacity.
- →A shortage year with record margins and long customer waiting lists.
- →An oversupply year with falling prices and factories running well below capacity.
Common beginner mistakes
- ✕Assuming shortage-year margins are the normal level.
- ✕Treating all chip companies as one type of business.
- ✕Ignoring how much capital manufacturers must spend to stay current.
Key terms
- Foundry
- A company that manufactures chips designed by others.
- Fabless designer
- A company that designs chips and outsources production.
- Utilisation
- How full a manufacturer's factories are running.
Key takeaways
- 01Designers, manufacturers and equipment makers behave differently.
- 02Long lead times create repeating shortage and glut cycles.
- 03Peak margins are cycle features, not permanent levels.
Check yourself
- 01Fabless designers outsource the manufacturing of their chips.
- 02Semiconductor capacity can be added quickly when demand rises.
- 03Factory utilisation strongly affects a chip manufacturer's margins.
Try the concept on a real company
Compare a chip designer with a chip manufacturer in the Analyzer and note the difference in how much each must invest.
Educational examples only. Not buy or sell recommendations.