Risk is reshaping the chip industry
02/01/2008
What does the sub-prime mortgage meltdown have to do with chipmaking? In today’s global, interconnected economy, probably much more than we may think.
When there is overheating in the economy, which happens periodically, Wall Street usually finds a way to light a fuse. We saw that in 2001 with the bursting of the dot-com bubble. Afterwards, it took a few years of very low interest rates to fuel a recovery and get the world economy humming again. The investment community provides an important service by helping existing companies grow and giving newcomers the capital they need to burst onto the scene.
But with easy money and growing liquidity, eventually greed always seems to infect the money mavens. Last year’s Wall Street bonuses and hedge fund payouts were particularly outrageous. Often huge profits came from lumping thousands of loans into what are called collateralized debt obligations (CDOs), which earned undeserved AAA ratings because the risk was spread so wide.
In the old days, someone from a local bank might take a look at a property and check the buyer’s creditworthiness before granting a mortgage. Then, big banks started to buy up those mortgages at a discount, giving smaller banks a quick payout. More recently, big investment houses saw an opportunity, and they began to pay upfront fees for any mortgage they could get to toss into a CDO. Not surprisingly, many of these latter-day mortgages went to people who couldn’t really afford them, often with tricky terms they didn’t understand.
The world financial system now faces huge losses, which are still murky because it will take time for loan failures and foreclosures to unwind. Meanwhile, easy credit has turned to very tough credit, or even no credit at all, even with central banks trying to give away money.
Now imagine a megafab project that requires, say, a couple of billion dollars. Few chipmakers have money like that lying around, so they need to borrow a good portion of the capital needed. Huge risks are involved because of the fickleness of end markets for electronics, and risk tolerance has been squeezed out of many lending institutions. No matter where it is in the world, such a deal is much less likely to get done now than it would have even two or three years ago.
In past decades, Korea, Taiwan, and more recently China, built up huge capital reserves and put lots of money into chipmaking ventures during slow times to capture market share. Now private companies in those nations will decide when to build up fab capacity, and they have grown much more cautious than in the past. New chipmaking hopefuls, like India and Brazil, do not have the resources to make much of an impact.
While all this may actually help to smooth out the roller-coaster oscillations of past semiconductor cycles, it also could mean chip shortages and high prices in the future, which could slow the growth of the whole electronics industry. Selling monster flat-screen TVs and electronics-packed executive jets to Wall Street tycoons can only take the industry so far, then the rest of us have be able to afford to buy some neat new electronic gadgets. Let’s hope Wall Street traders get back to the equity markets where they belong, and quit trying to conjure up inflated financial white elephants.
New Editor-in-Chief announced
Before I sign off, I’d like to introduce Solid State Technology’s new Editor-in-Chief, Barbara G. Goode, who was recently appointed to lead the editorial efforts online and in print. An award-winning technology-industry editor for more than 20 years, Goode’s experience includes nearly a decade as Editor-in-Chief of Sensors magazine (along with Sensors Online, Sensors Daily, and Sensors China). She has also served as editor of SST’s sister publication Small Times-focused on development and application of “small tech” (nanotechnologies and MEMS)-for the past year.
“I welcome the opportunity to serve readers in the dynamic semiconductor manufacturing sector and to work with the highly respected professionals at Solid State Technology, Microlithography World, and WaferNEWS. This team has exceptionally high standards and continually earns its reputation for excellence,” she said.
We look forward to working with Barbara to serve your information needs. You can reach her at [email protected] or 603/891-9194.
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Robert Haavind
Editorial Director