Samsung & Intel – Supercycle pt. II

More peak cycle signals.

• Following on from its strong Q2 2021 results, Samsung has announced that it will be investing an eye-watering KRW240tn or $215bn over the next three years (see here) which combined with Intel is a further sign that this cycle is big and that the peak is not that far away.
• This investment includes the hiring of 40,000 people to cement its leadership position in the technology industry.
• This is an amount that would make even Apple think twice and will almost certainly lead to some margin pressure in the short term.
• Samsung joins Intel in planning to spend $200bn+ but Samsung will do this in three years compared to Intel’s which is over a much more sensible 10 years.
• Not surprisingly the two headline investment areas are in semiconductors where it aims to maintain and extend its dominance in memory and storage as well as to become the global No.1 in system semiconductors.
• This is a big ambition as it implies that Samsung is going after TSMC where it has a huge hill to climb given how far ahead TSMC is in the foundry industry.
• Samsung is also intending to invest in other areas like 5G and AI but I suspect that the investment allocation will be small compared to that which is allocated to semiconductors.
• Samsung’s ambitions come from a strong base meaning that its ambitions are attainable, but I see this as a signal that the semiconductor cycle is not far away from its peak.
• In a typical cycle, capacity becomes short when demand ramps up because it takes a long time to bring new capacity to market which leads to tightness in supply and robust pricing.
• This then leads to increases in capex to meet the demand which everyone expects to win meaning that in total, the capacity plans outstrip supply.
• The drivers of the cycle are different every time and this time it is the pandemic and geopolitical tensions that have driven both increases in demand and tightness in capacity.
• Because both demand and supply have been hit at the same time, it means that the semiconductor cycle is significantly larger than usual which is why semiconductor companies are in general reporting such good results.
• The current situation is likely to persist for a while meaning that margins will expand further supporting the upward leg of the supercycle.
• As a result of the strong demand and the geopolitical tensions construction of new fabs is currently running at fever pitch and these are set to start coming online in 2022.
• Hence, I suspect that sometime in 2022, the demand will begin to stabilise with capacity starting to come online pretty much at the same time.
• This will trigger a down cycle which will be particularly severe given how sharp and strong the upcycle has been this time around.
• I would not want to hold semis when this rolls around and the spending plans of Samsung, Intel, TSMC, and so on only go to indicate how big the cycle is becoming.