Ok, this is my last thread of 2021 & I'll talk about something that is MOST valuable in global exports - semiconductor - or chips, that powers the modern world. This is also very topical as we use it in our daily lives & at the center of politics & geopolitics given its shortages
In case you are wondering why we should know more about this most valuable global export item (worth about USD1trn & more valuable than oil), then we must not forget that in order for me to tweet this, we need chips. If we use the body analogy, chips = brain & oil is like blood.
Let's start with definition:
a) Semiconductor or in UN classification is known as cathode values & tubes & USD949bn was traded in global exports
b) It's a manufactured good & an INTERMEDIATE
c) U don't see it in the final product but products like CARS & laptops & mobiles need it
So the most valuable item in global trade is something you DON'T SEE as it is an intermediate product. You only see the final products such as cars/laptops/etc.
Chips are one of the US top exports (airplanes, oil, chips). China is a net importer of chips. Has a deficit of chips.
Meaning, money flows from China (USD350b) to chip exporters (North Asian countries like Taiwan (TSMC), South Korea (Samsung) & the US (Intel, Global Foundry). Let's talk about chips & its supply chain & why this is the US China trade-war & key to our national security (CHIPS ACT)
Chips were invented in the US & the US has 47% market share, Korea has 20% and Japan 10%, Europe 10%, & Taiwan 7%. China 5%.Now u may ask, well, why is the US fretting over chips if it DOMINATES. Because wants to retain the lead & this 47% includes design & manufacturing is less.
Before you say, "I'm so proud to be an American" and bask in your glory (well, I am rather proud), let's look at the value added by activity or supply chain of chips. And this is where the Biden administration (Trump before it) & Senator Warren are having issues: MANUFACTURING.
Let's put it a different way: American semiconductor firms are doing the R&D intensive part of the supply chain & they have OFFSHORED most of the manufacturing to Asia in various places in various segments of the supply chain, from Taiwan to Malaysia & Vietnam. India wants in too
Note that the US still remains MOST OF THE VALUE CHAIN but increasingly LESS. Consumes 25% of global semiconductor while China 24%, so the same. Europe about 20%.
So where's the beef? The issue is that we DON'T manufacture most of it in the US so have little control over supply.
I won't go into the R&D part of the US supply chain & go straight into the heart of the matter & why I quote Senator Warren's tweet, which I think is simplistic but sets the tone of the hour.
The USA lead in R&D but LAG in manufacturing. Who leads? Taiwan! Specially, TSMC.
To understand this chart, you need to understand a bit about chips but let me, a non engineer explain what this means: Foundries are where chips are manufactured. Manu of chips are capital intensive & very high tech. Basically u want smaller & faster chips & TW dominate < 10nm.
This chart shows u by region (basically we only have a few firms here so this is where Senator Warren goes off about too much concentration but the consolidation is necessary as it's EXPENSIVE to build a foundry).
TW & SK lead or TSMC & Samsung.
US has Intel + Global Foundry.
TSMC is ahead and DOMINATES <10nm & the US lags in this point. If u read the March 2021 US National Security Commission on AI paper, then it's all about the LACK OF MANUFACTURING in ADVANCED CHIPS that's a huge liability.
Btw, the former CEO of Google is a key author of this report that calls for more support of US manufacturing of chips because it is the support from other governments that has allowed them to thrive.
Anyway, key pts are: we are good at R&D & bad at manu
Okay, let me wrap this up on why it matters to you, first, u use semiconductor as it is an input into electronics (the brain). U want a faster brain that is not too heavy right to help u with ur whatever tasks. Anyway, below is where the usage of chips is as a share of total. So?
Well, u know the SUPPLY of chips demand on INVESTMENT & it's capital intensive (at least 10bn for a decent foundry) & takes about 2 years. Plus we got Covid-19 related disruptions like Southeast Asia shutting down in Q3 2021.
Demand is HIGH & even acutely higher because Covid!
Note that I'm saying the following: we got supply that is relatively INELASTIC in the short-term for chips because of capacity constraints & time lag in investment & the fact we depend on TSMC for <10nm size. Second, operations were hit (remember my ASEAN note?) 3rd, demand high
Ok, so what happens now? First, the US will try to retain its lead. The Biden Administration has the CHIPS Act that has 52bn passed by the Senate waiting for the House to pass that gives incentives. Btw, @intel is basically the last American manu at the size that can compete. So?
Given that there is so much emphasis on getting US manu up to speed, one an reckon that more support will be lobbied by American firms, and specifically 2 left that manufacture & specially Intel to get it to the competitive level or the US won't have any (if can't compete, exit).
The US isn't the only country. EU has a similar strategy but the US has more to lose & what the supply shock crisis shows that we have too much concentration risk to East Asia & in some sector Southeast Asia for manufacturing in general & that means more diversification needed.
Arizona has emerged as a place where Intel is adding additional foundry (basically connecting to its existing). But TSMC is not silly. It is smart. It knows where the game is headed & building there too. So is Samsung.
In fact, TSMC also looking into the EU given policy shift.
Note that American firms such as Intel have a global footprint. Specifically, it has investment in Vietnam and just added USD7bn to Malaysia.
India just passed 10bn bill to attract semiconductor (it wants in too on the supply chain). Diversification will include ASEAN + India.
Hope I got u excited about semiconductor & know a bit more about the product that U DON'T SEE BUT SHAPE YOUR LIFE, CPI, INTEREST RATES, DOMESTIC POLITICS, GEOPOLITICS & geeky & cool at the same time.
And yes, I think the US SHOULD support the sector, both R&D & manufacturing.🙏
I have more too add but my threads always end up so long & let me end it by giving you the sources I used for this rant:
Have a happy new year! This was my way of saying thank u for being with me on Twitter Land. No matter how good/bad life is, key in my opinion is to focus on learning & processing what we learned to understand more about our world & each other!
India unveiled its FY25 budget yesterday (btw, they have another one in 6 months) & it was very much a fiscal consolidation, jobs, and responding to people's beef about the woeful labor market (Modi lost seats in Uttar Pradesh).
Before I talk about the Budget, let's talk about India labor supply & demand. Ready?
As you know, India is the most populous country in the world today & will be even more so in the future.
Let me put it a different way, by 2040, one out of 5 people will be Indian.
So what happens to India matters because it's a fifth of the world population by 2040.
India will have more people than China or the same as China and the US combined.
Yes, a lot of people. That's beautiful (generally referred as demographic dividend assuming that we have jobs for them) and highly problematic for India (high joblessness and civil unrest), Indian politics and also how to manage this massive supply of people (skilling them, finding jobs for them etc).
First, nickel is a material that has to be DUG out of the earth & process. Some easier (colder nickel in Russia) & some harder like wet & warm places like Indonesia where you have plenty of it but it's the processing that's difficult.
Here comes China.
The mining & processing of nickel are energy intensive. And more importantly, for Indonesian nickel, it was considered too low grade to do & China had breakthroughs in a technology called high-pressure acid leaching (HPAL). "Low-grade nickel ore is placed into pressure vessels, where it’s treated with sulfuric acid and heated. After that, the nickel that separates out will be suitable for batteries, once it’s refined"
China new home sales fall further & while some may say that the real estate is now not so important for China, it remains a key driver of wealth effects & that is negative. Meaning, the data dump that we will get in 10 mins will likely show a further misaligned economy where consumption falters while supply rises.
This will add to further tensions with the West & even the South as China will need to export that excess supply, driven by policy to rise in the value chain, or to vertically integrate its supply chain, to the rest of the world.
Chinese corporates will increasingly have to do it via tariff arbitrage, as in third country export or building factories where they want to sell.
Some say it doesn't matter as Chinese firms gain market share.
Actually, it does matter. Employment matters. So unless they can get Chinese workers to manufacture goods in third country or in the country/region of export, over time, employment demand will fall in China for manufacturing.
Instead of a landslide, we got earthquakes, Modi & the BJP got the most seats but much less than they benchmarked (400) & less than 2019 (303) at 240. To govern, they need to work with fickle allies to operate a coalition government.
This will require a much more consensus driven governance.
That may be positive or negative depending who u are. Meaning, in the short-term, forming a government takes priority over long-standing reforms that are already politically difficult when they had the government. We may have more fiscal welfares & so if we continue with the same capex, fiscal deficit may widen. Or we may have less capex than before. Irrespective, this area will be watched carefully. Under Modi, grain & fertiliser subsidies remain large & was promised to be in place.
Note that India fiscal deficit has consolidated as of late but remains large. What has changed is the quality - higher tax rev ratios & more capex & less subsidies as share of GDP
Some say that a coalition won’t change as it is still Modi in change. But that is IF a coalition stays the course (he got some really fickle allies) & this that if adds to risk premium in the short-term.
Irrespective, India fiscal is in a rather decent shape so we have a solid foundation to work with here.
This article in the FT doesn't make any sense. The author argues that Modi fails to create job for low-skilled people, esp labor-intensive manufacturing. It also faults Modi for its high-end growth (services, high-tech, infra, etc)
But then it ends with saying, well, don't bother to even develop manufacturing and just work on service exports.
Btw, all the critiques of India makes sense. The issue I have with Rajan and also Congress is their solutions.
They don't have one. Literally. Rajan tells India to forget about trying to do manufacturing & focuses on services.
India exports a lot of services. Manufacturing is the weak spot, not services!!! And if u want a lot of jobs, u need labor-intensive manufacturing.
A country with such a large population needs to growth via all sectors - services, manufacturing, agriculture etc. You can't leapfrog development & go to services.
India & the Philippines have tried that. Not working & hence need to include manufacturing & infrastructure building.