Supply issues are impacting multiple industries.
September 10, 2021
The global chip/semiconductor shortage has caused significant problems in the automotive industry while also having a ripple effect across the entire technology space. Manufacturing has been a problem due to labor shortages and issues caused by pandemic-related disruptions. That’s not the only problem, however, silicon shortages have caused problems and increasing demand may remain ahead of increased production.
The shortage has been exacerbated by the shift to electric vehicles. A Ford Focus, for example, uses about 300 chips while an electric Ford uses around 3,000. That’s a ten-fold increase coming at a time where electric vehicles are slowly taking over more of the market.
There have already been significant real-world effects from the lack of chips. Toyota has been candid about its manufacturing problems and has cut global production in September by 40% — about 360,000 vehicles!
Solutions are coming as multiple chipmakers plan to add capacity, but it’s not easy to spin up these factories which cost in the range of $20 billion requiring two years to come online. Chips, it should be noted, are also used in all sorts of technology and that could lead to shortages and/or higher prices on everything from computers to appliances, and televisions this holiday season.
It’s a problem that has no easy answers which impacts everything from new car prices to the automotive industry and consumer electronics. Most, if not all, Americans will feel some impact from the chip shortage (even if they don’t realize it) because the ripple effect carries over to areas the impact everyone like shipping. Simon Erickson and Steve Symington joined Dan Kline on the Sept. 8 edition of “7investing Now” to break down what’s happening and look at what the impact and eventual resolution might look like.
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A full transcript follows the video.
Dan Kline: So we’re going to talk about the global chip/semiconductor shortage from two angles. Hence it’s right in the title. What’s going on in the automotive industry, and the steps tech companies are taking to deal with it? Simon, you brought in the topic. So we’re gonna go to you first. But there are a bunch of problems here. So first, manufacturing capacity is a problem. Factories working with less workers because it COVID There were all sorts of reasons keeping people at home, slowing down capacity. But that’s not the only issue. I’ve highlighted here. There is a lack of silicon that is a crucial raw material to making this. And the shortage has been exacerbated by the move to electric vehicles.
This is something I learned literally this morning, or maybe yesterday afternoon, a Ford Focus, which I used to drive, takes 300 chips, not a technologically advanced car, that car had a horn, and maybe an a.m. radio like it was not a great car. An electric vehicle takes about 3000 chips. So I’m going to guess my hybrid vehicles probably somewhere between those two, that is a giant drain on this. So is there a solution for this? Are we simply looking at not having enough chips for cars for the foreseeable future? Wow, that was a long introduction. My apologies.
Simon Erickson 2:03 I’ll just say that was impressive. Dan, I think we all have coffee, you had bone broth this morning. We are ready.
Dan Kline 2:10 That is part of my try to do things more healthy kick led by Maxx Chatzco go. My wife asked me the other day, why am I eating so many almonds. But back to the chip shortage here.
Simon Erickson 2:21 Very impressive. Well, yes, the answer is actually both of what you described, there is a solution to this. And there’s going to be a shortage for the foreseeable future. I think that kind of maybe to set the table on the story, we should talk about just what a magnitude this chip shortage is, and how it’s wreaking havoc on the auto industry. You might read the headlines and say, okay, there’s a couple 1000 cars that probably, you know, automakers aren’t going to be able to roll out because they can’t call the chips they want.
Toyota just said it’s cutting its global production forecast by 40% in September. That’s 360,000 vehicles across the entire world. I mean, when you think about how the average selling price is, depending on what that would be. This is billions of dollars, even just for one automaker. Multiply that by all the others that you also mentioned out there.
Again, this is a huge, huge problem. And the answer is that cars are requiring more chips, just like appliances are requiring more chips, just like anything that’s consumer electronics product is requiring more and more chips, and there’s only so much capacity that’s been there to keep up. And we’re seeing globally, the companies that are either designing those chips, the first angle to the story, or the companies that are manufacturing those chips, receiving the designs from the chip makers themselves are both kind of stretched to capacity at this point. And it’s getting very interesting from an investing angle in so many different perspectives.
Daniel Kline 3:37 It’s also a pretty big supply chain problem. And as Steve will work you in here soon, I promise. But think of it this way. If you’re a car company and you only have X amount of chips, you’re going to make the cars you make the most money on. Well, that has a ripple effect. It means you’re not making cheap cars, it means you’re not making cars that go to rental car companies, which have, you know, sort of a ripple effect to whether I travel or not. So there is a big economic impact. We’re going to talk about that a little bit in the second half. But Simon, does that mean that cars are just expensive? Or is it possible that Ford says Geez, I know we want to make more electric vehicles. But boy, we could charge a fair amount for a Ford Focus right now. And we could make 10 of those for every one electric vehicle we make.
Simon Erickson 4:24 Well, Ford and Toyota and every other automaker is in the business of making money. So they’re going to definitely adjust their short-term forecasts on where they actually can get supply rolled out. But generally the way that chip-making works is you’ve got some really, really cutting edge chips that are going into the highest, the highest demanded applications. They’re typically in smartphones. If you look at Apple’s iPhones, those are some of the most demanding chips with the smallest nodes of process technology that are globally out there. And over time, you know, we get improvements in chips, we get seven-nanometer nodes, we get five-nanometre nodes, we’re already down to some R&D work being done on one-nanometer nodes.
These are the gates that are going into transistors that are going to the processes that are going into consumer electronic devices. And those bleed down over time from super, super cutting edge into the rest of the market that doesn’t want to pay as higher prices right up front. Automotives are not cutting edge chip designs, they are not five nanometer nodes that you need for this. In fact, most of them are 25 nanometers or higher nodes, which is not as expensive. And so the answer of supply chain to your point, Dan is who’s taking on that supply capacity? If you’ve got the most cutting edge, fabs that are wanting to produce the most cutting edge chips, because those are the highest price points that they can get from their customers, they’re going to go after that, and everyone else is going to be filling in the gap.
We just saw a company in China SMIC, just I think five days ago, announced that they’re putting $9 billion to work for a JV fab with China’s government, right. And they’re going to be manufacturing only 28 nanometers and taller and higher process technology. So there is suppliers that will come online and meet this demand. It’s just that the ones that are out there right now that really know what they’re doing. They’re using it for their own smartphones, or they’re contracting at a very, very high prices for the most demanding customers.
Dan Kline 6:15 And Simon just to clarify here, when you say fab, you mean manufacturing plant? Is that sort of?
Simon Erickson 6:20 Yep. Yep. That’s a manufacturing plant for chips. Exactly. So I want to work Steven, a little bit here. So we’ll let Steve weigh in before we get to Simon. But of course, we would love your questions and comments. We know this is a dense topic. So if you have some sillier questions or things you want us to answer later in the show, we are more than happy to do that.
Dense topic. I love it.
Daniel Kline 6:41 Pun not intended. Steve, let me ask is this simply just a, we have to wait because you can’t easily build like you and I can’t go, hey, let’s throw a chip factory together the way if there was like a shortage of I don’t know, I’ve talked about this, my family being in the steel scaffolding business, we could have a makeshift welding facility to triple our capacity as long as we can get the raw materials. You can do that with with certain things. We’ve even seen Tesla do it. But it is probably not something you could do with something as precise as semiconductors. Right.
Steve Symington 7:13 Right. And part of this is that we need to understand – this is partly as far as automakers go, a disaster of their own making right. There are some natural factors at play that kind of back this up even further, like you’ve got a drought in Taiwan, that has made it challenging to actually meet demand because it takes a lot of water to make semiconductors, right. And at the same time, you had automakers who going into the pandemic, basically canceled orders, canceled chip orders, because they’re predicting out, you know, six, eight months what they’re going to need. So they have to order these well in advance.
So as soon as they canceled those orders, you had chipmakers kind of retool a lot of their fabs in order to focus on the booming demand for consumer electronics. And what happens then is automakers say actually never mind. Like you can’t just say, Hey, you know, please, you know, put this order back in. And we’d like that demand back. Like it’s not that simple. You don’t just pull a lever and have your entire fab switch back to be able to address that demand that’s pushed back. So you know, I think we’ve seen CEOs like Intel said, it’s probably going to be two years, couple of the other CEOs came out and said it’s probably going to be late 2022, at least so I think we’re looking at about a year or two, before we kind of catch back up. And all these factors, sort of the confluence of events that allows this to kind of wane.
Dan Kline 8:42 Rashad, I promise, we will get to your question, but I want to follow up on that. Because as someone who ran a factory, I think I have some insight here. When you have a weather reason why you don’t sell as much, you don’t stop producing, you might adjust your production down because the one thing I’ve learned running retail and manufacturing business is a certain percentage of sales never come back. So a snow day at the toy store. Those sales are gone. But not all of them. So if you’re a car CEO, a CEO of one of these car manufacturers, it does seem short-sighted to me for you to go, okay, there’s a pandemic we’re just going to stop production, when instead they could have been building at a third or a half or whatever it was. Because Simon, am I wrong that in some cases, you can delay a car purchase but eventually your car becomes unrepairable or undriveable. That there’s an inevitability here and it feels like there was some bad planning as part of this.
Simon Erickson 9:38 The semiconductor industry is notorious for being cyclical, where it typically you’ll see capacity expansions like this, where supply is tight and the chip manufacturers in the fab say hey, okay, we got to we got to make more chips. Let’s add to our capacity to spend the capex budget and let’s bring all this this this new volume online. And typically, historically, traditionally, that’s been followed by a time of lower pricing, where you build out too much capacity to keep up with demand that’s out there. And the market kind of goes like this, right? I am of the belief as someone who’s really, really looked at this a lot during the last year or so that this is a step change in demand for chips, for cutting-edge high-performance processors.
And I don’t think that it abates, I don’t think that this is going to be a planning cycle or budgeting cycle, or we’ve got too much capacity a year from now, I think that a lot of this capacity that is coming online, is tied up, I think that Samsung or Intel, or Taiwan Semiconductor, whoever it is that’s making the chips is investing 10s, if not hundreds of billions of dollars in the next five years, because it’s a very conservative forecast. They’ve got orders that are lined up and ready to go for these chips, that they’re producing for automakers, for appliance makers, for consumer electronics makers, whatever it might be.
And so I think that I would, I would personally dispel the notion that this is just going to be another cyclical, you know, top for the industry, that’s going to come right back down. I think that the reason you’re seeing so many announcements right now, so many press releases of new capacity coming online, Dan, we see them every week now – it’s really to just keep up with all these different applications. And depending on whether how cutting edge those chips really need to be.
Dan Kline 11:21 And the numbers bear it out. So if you look at the forecast for what percentage of vehicles are going to become electric, even the most conservative forecast, and then you go wait a minute, these electric vehicles use 10 times the chips. Oh, and by the way, when the new phones come out, they use more complicated, they use more. Your television uses more everything is increasing demand here.
So I don’t think this is a case of, you know, like the gun industry had to question whether to increase capacity, or that demand would be one time. Well, your gun doesn’t wear out the way your television does, unless you’re, you know, an avid hunter or something. For the most part, there are industries that can forecast demand, the car industry might be able to forecast demand. But it has a long way to go to catch up when you’re talking literally 10 times the amount of chips.
We’re going to get to a couple of questions in a second. But I had one I wanted to throw an assignment before we get to yours. And then of course, we’ll talk about how tech companies are taking things into their own hands. But Simon, let me ask, could the shortage of vehicles change how we do transportation? Let me give you a concrete example.
So I’ve talked a lot about – I have a place near Disney World. And rental cars are very expensive right now. So Disney has already put in the infrastructure with its different ways you can get from its hotels, the skyline, or the boats, the buses. But I actually think the city of Orlando might put in more infrastructure, and we’re seeing high speed rails and other things go in. Do you think that those are sort of like one offs or that nationally, we might address transportation in a different way?
Simon Erickson 12:56 Holy cow, Dan, that’s a that’s a dense question. That’s a beef broth kind of question right there.
Daniel Kline 13:02 It was chicken broth to be fair, chicken.
Simon Erickson 13:05 How is this going to impact transportation? That’s one of a zillion variables right? From ride-sharing and the cost of ownership of a car, to if you’ve got electric vehicles on something like the Tesla network, is that a cash-generating asset for you rather than something that depreciates off the lot? 40% after you drive it away, urban planning, you know, are city’s going to be more friendly and conducive to mass transit. I mean, the Smart Cities themselves internet-connected cities, they’ll need more chips, but maybe it’s much more efficient. I mean, there’s a lot to unpack there, I guess. Rather than just completely skirt the answer the question to your question, I do think that all of this is going digital, and it all is being monitored and the analytics are being closely watched.
And of course, all of that’s going to need semiconductor chips, just like the Internet of Things is going to need billions of semiconductor chips to keep up with the forecast they have. And global supply chain of those semiconductors is certainly going to influence all of that. So there’s a lot going on. I don’t know for sure how this will impact things down the road. But there are a lot of moving pieces here.
Dan Kline 14:12 It’s also worth pointing out that transportation doesn’t change quickly. So I’ve talked about Simon how my wife and I are looking at buying a new home. And one of the communities I looked at actually had driverless automated shuttles that take you to like the pool and the clubhouse and things like that. And that’s really cool. And it limits you owning a golf cart or driving your car. But for that to become a widespread thing needs an awful lot of infrastructure.
So I brought up Disney World, because college campuses and closed-loop places are going to have this, but those are not solutions we can implement in time to sort of offset what we see happening with the chip shortage. I want to take Rashed’s comment here, because it’s one I think both of you will have an opinion on it. Let Steve start first. He says can the chip shortage affect Tesla over the short term? Let’s get it back to a pure investing point, Steve you can go first here.
Steve Symington 15:03 I would say it already has, to some extent, and I think it kind of helps the Tesla hasn’t scaled to the extent that, you know, larger automakers like Ford and GM have. So they’re not necessarily you know, and we’re not talking about, you know, millions of vehicles produced on a monthly basis. I think that actually helps Tesla, but they did if memory serves shut down their factory in China for like four days last month because of the chip shortage. So it’s affecting them already. They’re definitely not immune to this. So yeah.
Dan Kline 15:40 Simon, did you want to add in here, and we appreciate that comment. Rashed, we, we love our members, and we appreciate feeling the love back sometimes. Yeah, thanks very much Rashed.
Simon Erickson 15:52 Depending on how you want to take the program, I think it’s kind of a perfect segue of companies that want to design their own chips in-house, Tesla being one of those because it’s very interested in self driving cars that are computer vision.
Daniel Kline 16:05 And so let me so let me let me jump in a little bit here, because this is our next segment. And it probably is a good time. Basically, manufacturers used to not think about this. And we’ve seen a shifting trend to more of them saying a couple of things. One, I’m worried about supply. But more importantly, and this is sort of where the lead with Apple has been, I want my chip to do what I want it to do. And to do that means being involved in the process. Simon, that’s something you could speak to, and you brought up a term that I previously thought was only a sneaker brand.
Simon Erickson 16:39 Yes. ASIC is an application specific integrated circuit. Also a great pair of shoes, like you mentioned, so there’s different purposes. But okay, so back to the chip design part of this, we mentioned it a little bit earlier in the program is now companies are bringing a lot of the know-how with a large enough balance sheet, and a large enough, you know, in house engineering team to actually start designing a lot of these chips themselves. I’ll use a fun example to start and then I’ll actually go to some real life examples that are going on out there. But Dan, let’s say that you want to create your own custom chip to mine Dogecoin. Okay.
Daniel Kline 17:13 I do you’re a step ahead of me, as always.
Simon Erickson 17:16 Or Dan coin or any other cryptocurrency that’s out there, right? You might design a custom chip that will do that as efficiently as possible. And by efficiently I mean, get you the most number of Dogecoin you can mine for the least power consumption, which translates into electricity costs as possible. And we’ve seen kind of this progression from there used to just be CPUs that would do this. But there was an entire industry of GPUs that kind of got brought in again, Steve knows this from following for a decade of the Nvidia and the AMD’s of the world saying, hey, GPUs are a huge opportunity to do things more efficiently.
Now, it’s kind of the next step of if you’re a company like Amazon, and you’ve got a platform like Alexa, that you want to understand the recognition of what people are saying, and you want to go dig out the answers to that, and then serve it back to them, you might have a chip that you’ve designed yourself to do that as efficiently as possible. Back to the Tesla example that Rashed just brought up, you might want to be able to recognize other cars, bring it back to your neural network and say, Okay, put on the brakes, there’s a car in front of you, right now. If your alphabet and you’ve got servers all over the world, you might want to manage those operations to get power consumption to a minimum, based on the IT operations that you need to conduct there.
All of these are starting to emerge as companies are finding ways to get an ROI and actually putting the work into designing their own chips. But again, Dan, this is not easy. It’s not like you can go out there and spin this up for $100,000. A good chip design, just the design part of it, not talking about the manufacturing, just the design is probably going to cost you $30 million or more. And there’s only and plus the know how, and you know, the return on the application of whatever you’re doing out there. But you’re starting to see more and more big tech companies really, really interested in this space.
Dan Kline 18:59 These are very expensive employees, and there’s a lot of competition for their services. But Simon, is it fair to say that the manufacturing is going to largely stay with the companies that have done this before? Because even Apple, and Apple could literally do whatever they want, like, you know, if Apple wanted to buy, I don’t know, Canada tomorrow, there’s probably a price they could get it done. But Apple has made no hint, no sign that they’re going to consider doing this. They are going to be very involved, but they’re not going to manufacture. Is that kind of what we should expect to see?
Simon Erickson 19:31 Yeah, I mean, that’s kind of the eternal question, right of Apple wants to pump out more devices outside of smartphones to do you want to have the Apple Watch now that’s gonna have sensors embedded in it to monitor your blood pressure and your heart rate and all the other things are promising. Is it gonna be an Apple Car, we’ve talked about an apple car, I mean, all of these decisions aren’t just like,
Oh, hey, that’d be kind of fun. Apple being as global of a supply player as it is going to have to contract to get those chips produced. And it’s not simple to do it themselves. You know, when you think about the cost of a fab, a fabrication facility, I’ve seen some research and articles that say, Oh, you know, $5 billion, $10 billion? Oh, no, no, no, no, that’s more like $20 billion and two years. And you’ve got to have the right personnel and the training to scale all of that up.
And then you’ve got to continually make R&D improvements. So you don’t get lapped by the people who have been doing this for 30 or 40 years already. It’s complex. Dan, I think that it’s more likely, rather than seeing the designers go downstream and manufacture them themselves. I think you’re gonna see more and more exclusive contracts that have minimum volumes for price breaks.
Daniel Kline 20:34 I want to get to Steve on the why in a second. But Simon, we did a whole show on Intel a few weeks ago. I don’t remember the exact date. Is this the turnaround factor for Intel? Like, this is basically the person nobody wanted to take to the prom, and all of a sudden the phone is ringing off the hook. So Intel was a struggling company, and now they have capacity that is not easy to duplicate.
Simon Erickson 20:58 Yeah, this is Pat Gelsinger back at work again, right. Pat Gelsinger goes back to Gordon Moore, you know was kind of Moore’s Law, you know, the first leader of Intel to kind of push into the microprocessor heyday, 70s and 80s. It was just pump as many CPU chips out there and get them into computers as you possibly could, as PCs were finding their ways on everybody’s desktop.
Now we’re kind of in a world of Hey, everybody needs chips. Intel knows a thing or two about making chips, it’s already got fabs in the ground that they can more easily expand and somebody could build them brand new. And Intel’s new CEO, Pat is saying, Hey, we’re open for business, if we can put some capacity out there, you want to work with an American-based manufacturer. And I say that because there’s definitely political interests and America working with having its own domestic supply for this.
Hey, Apple, hey Tesla, hey, any tech company that’s in California wanting to produce ASIC’s and cutting edge chips, we’re ready for your business. And we’re going to launch Intel foundry services to capture a lot of those new revenues. I think it’s a good move by Intel. But again, this is hard. It’s competitive. Intel’s behind the curve on process technologies, but there’s a lot of business out there for the taking.
Dan Kline 22:10 Steve, I want to jump over to you here. So big tech is getting involved and on a more intimate level. What are some of the advantages that will come out of that? These sort of like very specific chips here?
Steve Symington 22:22 Right. I mean, this what they get is a specifically designed chip to reduce energy consumption for their own devices and products. Right. So if from the specific company whether it’s, it’s, you know, an Apple design ship that works very well with the rest of the, the design of their products, or you know, some sort of Google device or Lexus smarts because I see the light pop on over here, whenever I say that, but yeah, you know, any, any sort of smartphone or integrated cloud services, or they can design the chips to be optimized for their own products. But again, it’s a matter of designing it and, and outsourcing production, that manufacturing – it’s basically to work as efficiently as possible with their own tech.
Daniel Kline 23:12 We are very careful about saying the name of the Amazon device because it sets things people’s houses off and causes all sorts of problems. But I will point out that Simon mentioned that just creating the the Alexa interface, if I’m reading this correctly, cost $25 million plus. And to say that is a flawed interface. Well, I wouldn’t have had to just say what I did about it inadvertently getting set off. If it was already perfect. We only have a couple more questions. I’ve got one more for you guys. And then Simon, I wrote one for you to ask me because there’s sort of a black friday angle to this as well as we are heading into sort of my favorite season of the year. I don’t love holidays. But I do love the Christmas shopping season. And that is do you see these shortages being corrected? Is this a problem that’s going to linger like for years, and then I’ll talk about this a little but there are direct impacts of this we’re already feeling I’ll let Simon go first. And then Steve.
Simon Erickson 24:10 I think it lingers for several more years. I don’t think that this gets corrected in any means in the short term. And you see the actions being taken by by the big three, right? Big Three. I mean, the chip manufacturers Taiwan Semiconductors #1, Samsung’s #2, Intel’s #3, and Intel’s already said hey, we’ve got to capacity. We’re open for business with the foundry. Samsung is investing Oh goodness, what was it? I can’t remember the number off the top of my head but they’re already saying they want to put a $17 billion expansion in Austin, Texas for a fabrication facility and Taiwan Semi said they’re gonna put $100 billion 100 billion over the next three years and expanding their global capacity. All of these are tied to orders Dan.
And so when you see that kind of magnitude being put, you know into the wafer fabrication equipment and all the CAPEX it’s going to work here, you’ve got to assume that these companies aren’t stupid. And they’re not just doing this for a six-month correction and in demand. I mean, they’re planning decades out into the future, and pushing the prices down further and further and further, for more and more. consumer electronics that can do more and more operations per second and are more and more efficient out there. I think that this is kind of the new normal, in my opinion, I think that AI has changed the game. And the applications that utilize machine learning are so complex now that they can’t just cut it on the chips in the CPUs that were out there. This is kind of the renaissance of the semiconductor industry.
If you followed this industry for years, you’re cheering because you’re in the golden years again now. And it’s kind of an exciting time for investors as we look for things like profit margins and demand to ramp up in the coming years.
Dan Kline 25:49 And it’s important to remember that mainstream devices don’t get more simple. That doesn’t mean there isn’t sometimes a market for your jitterbug cell phone and your simplified television that only does television. But for the most part, just your basic device, even a person you know, using a flip phone, Maxx Chatsko joked that he still has a flip phone, I have no idea if that was true or not on our show, but it wouldn’t shock me. But even that flip phone is way more complicated than the comedically large Seinfeld-esque flip phone I had, you know, back in the 90s, that we’ve all experienced on some level.
So this isn’t sort of a genie you could put back in the bottle. Really the tipping point here is some sort of new invention we haven’t thought of. And I’m sure someone is working on that. But Steve, we’re going to take a couple of questions and comments, after your comments after my little section. And we appreciate all of you weighing in. But Steve, I know you wanted to give a little comment here.
Steve Symington 26:41 Actually no, we tackled all that and spoke to what I was going to speak to a little bit earlier in the show. I think Simon summed it up pretty well.
Dan Kline 26:51 I appreciate that. Simon, if you want to ask me the question I I threw out there, I’m gonna be very quick here because this is just sort of the actual, what happens in the real world impact of this. Like, we all know, if we tried to buy a car, my used car is worth more than I paid for it like six months ago, which is not typical by a lot. But Simon, let me throw it to you here.
Simon Erickson 27:12 It’s, this is another reason I love this show, Dan is because we get different angles from each of our advisors, you know, whether it’s Steve, who worked in machine learning you who worked in retail, me who’s been following semiconductors. I mean, we kind of get to all chime in and you get smarter about what’s going on out there together. My question for you as the retail expert on the team here is we said, hey, there’s a shortage of chips out there right now. I’ve also seen a lot of price increases kind of going into effect for consumer electronics, holiday seasons coming up, how does this impact the retail world?
Daniel Kline 27:39 Yeah, it’s going to be severe, and it’s going to be noticeable. Now, I do think because we’ve had a pandemic, and maybe people haven’t been spending the money. We’ve seen all the statistics on how much people saved and invested during the pandemic. So a lot of people won’t care if they pay $450 for a TV, they would have paid $350 for last year.
But things like computers, and oftentimes you replace your computer when you have to, not when you want to, we’re gonna see more expensive computers with less choice, I’ve experienced this, my son broke his laptop, and I basically used CNET’s, top 10 laptops under 500. And only one of the 10 was available. So that’s the laptop he got, we’re gonna see that on an intentional level at this Christmas season, where you used to see like HP would come out with a new laptop range, and they’d be like 75 different versions.
Now, there might be 75 different colors, there’s not going to be 75 different feature sets because the innards are going to be the same. We’re gonna see fewer are maybe even no really cheap large TVs, there might be some legacy ones that are out there that are really sort of dated technology. But I’ve talked about I spent less than $300, for 65-inch television, I might have been slightly more than $300. That legacy in my head grows as time goes on, but a very inexpensive 65-inch television. I don’t expect that to be the norm. Now. That doesn’t mean you won’t see some advertised. But that would be more like the old doorbusters where you know break into a Walmart, it’s don’t literally break-in, but you force your way into a Walmart when they open at 6am. And there’s one. whereas previously, in the past couple years, that was just something you could order online. If you paid attention during the holiday season.
Here’s the other thing that isn’t going to go away and we’ve had some sort of false relief here. rental cars are going to go back to being prohibitively expensive. So I booked a quick trip to see some friends in October. And I was shocked that rental cars were only about three times what I used to pay instead of seven times what I used to pay. I’m going to guess that as we get to the holiday season and people have to travel, those numbers are going to get bad again, because rental cars are low margin cars for automakers. They’re stripped down. They intentionally don’t have things that can break until you get to a very high end rental car. So these are real things. You’re going to see people not book trips because they can’t get to where they’re going. Once they get there. You’re going to see different types of trips.
Dan Kline 30:00 This could be good for Disney World, because that is a closed environment, this could be good for, you know, all-inclusives or cruises or cities like Washington, DC and Boston that have a lot of public transportation. That’s all supposition. But there’s going to be really real things that come out of this. Let’s get to your questions and comments. I wanted to take and you can throw the first one up there, I’m not even sure who it was from jt rahaga hoody says, along with the chip shortage, should we be concerned about dependence on China for rare earth metals? Well, I know absolutely nothing about this. So I’ll throw it over to Steve, who I think wanted to answer.
Steve Symington 30:34 Sure. I think the answer to that is, we’re already concerned about the dependence on China for rare earth, metals, mining, etc. I think if memory serves the China commanded something like 80%, of the global rare earth metals market in 2019. So I do believe that the US Department of Energy and the current presidential administration are both making that a priority. They have that in their crosshairs to bolster the United State’s position in the rare earth metals markets. So definitely some opportunities there for investors. But yes, I do think there is concern for the world’s reliance on China for that particular market thing, don’t want it to be cornered.
Dan Kline 31:26 And it’s important that there’s focus on this, sometimes things like this happen, because no one’s paying attention. And we’ve seen the ingenuity of US companies, when it comes to like the space race, we you know, we’ve had more advancements in the past five years than we probably did during most of my lifetime. So once you identify a problem, and there is a problem with chips, there is a problem with reliance on various places for various things. I’m actually pretty confident that private industry will do a good job, if not directly changing that. But getting us to where we want to go.
We’re gonna take a couple more comments here. If you want to throw the next one up, JT, I appreciate that. Good day, fellas. Simon, I was wondering about chips as a sector and the viability of a semiconductor ETF as a second investing layer to generalize and build on holding in a related June 2021 recommendation, thank you for not sharing the recommendation. That is we don’t share of course, our proprietary members-only content. So we very much appreciate thank you for doing that. So I mean, you want to jump in here.
Simon Erickson 32:29 We’ll get a demo song. And I might surmise that you’re you might be in Australia with based on the day. So whatever time it is for you, thanks for tuning into our show, if that is, in fact, the case,
Semiconductors. I mean, there’s winners. And there’s losers from this, there are some companies that I think are really the cream of the crop, when you look at this industry as a whole and an ETF, whether that is market cap weighted, or whatever else, they’re they’re quantitatively deciding the allocations of what’s going to that ETF is going to miss out on I think, picking individually, the companies and the stocks that are the biggest winners from this, you know, for me without getting too too specific of the names because I know that you mentioned you know, our June 2021 rec is very similar to this, you can see that there are applications that are very high in demand for very specific processes.
It’s not just something that says, Okay, everybody who’s got the capacity to go ahead and manufacture this. Chip design is becoming very, very customized right now. And the benchmark is like we were talking about earlier, kind of the efficiency of power of how they’re being used out there. And Nvidia owned this for years. But like more and more, there’s kind of kind of this custom silicon is is taking mainstage again, as it’s becoming more and more demanding. So I guess, to answer your question around about way ETFs are great. I think there’s a lot of opportunity for this entire space. Just as an individual stock picker, I really get excited about particular names even more though.
Daniel Kline 33:59 Yeah, and Simon, I’ll give you a second to decide if you want to take the last two comments, either one of those, but I want to comment on ETFs The problem is when you buy into an ETF and there are some ETFs I like, you often end up owning companies you don’t really want to own especially when you’re in a space that has limited players. So I have some experience breaking down cannabis ETFs and I’ve never looked at one where I don’t go like oh, there are four out of 10 stocks here where I wouldn’t want to own if Simon gave me the money.
Like that’s so I do think I’m not saying there can’t be an incredibly thoughtful well-done ETF that is a good passive investment for some people. I’m not Pooh poohing any one style I’m just saying there’s not that many to pick from here. And then you sometimes get to the weird thing like you know, like why Starbucks in this ETF for semiconductors? Oh, because designers drink coffee? Like could be a lot of weird logic as to how ETFs work Simon, do you want to grab either of those?
Simon Erickson 34:55 Question: So why are there so many foundries in the world? And why is the bottleneck with TSMC? Which is Taiwan Semiconductor, which is the largest foundry in the world? Yes. I mean, this is again, that kind of a step change, right? Taiwan Semi’s got contracts that it has to fulfill for each cut its customers out there, which are kind of all over the place. But smartphones is a big application for that. Apple is contracting with them. And so they’ve got a lock on that. Samsung wants to make its own smartphones with its own internal capacity. Intel’s making its own branded processors, I mean, kind of, there’s only so much to go around of the big hitters that are out there.
It’s not easy to just say, okay, we’re going to spend $100 billion in the next three years to keep up with Taiwan semi. I mean, if you want to have not only the manufacturing process, but like the design and kind of helping away the entire process from design to having a chip, you know, I should produce for you. It’s very complex, it’s very hard. And so the bottom that question kind of gets to that if there’s really only a handful of companies that can reliably do this, Taiwan’s Semi is almost 60% of the world’s global foundries capacity, you are working with them if you’re serious about making chips in volume today.
Daniel Kline 36:07 And it’s also important to remember that over the past year, Labor has been a concern. There have been reasons for factory slowdowns. And, you know, you can have all the people ready to work. And if you can’t get your raw materials because the truck drivers are, you know, are in the hospital or sick at home or are dealing with other issues. There are a lot of concerns that have sort of slowed this down. We’re gonna take one more comment from Max Lucas. Then we’re going to go into our next section where we’re going to talk about some really big changes with cryptocurrency in El Salvador. It involves McDonald’s, it involves Starbucks taking cryptocurrency, we’re probably not going to talk about that. But I found that fascinating. Max Lucas says I had a professor in college, I used to work for the US government identifying locations and plans to quickly ramp up rare earth mining if needed. Steve, why don’t you weigh in here?
Simon Erickson 36:58: I appreciate the professor in college. He used to work for the US government comments, there’s so many professors who work for the government doing interesting things like that. And that was actually my first job out of college was a professor who hired me, because we had government contracts for artificial intelligence and machine learning and feature extraction and all that good stuff. But yes, yeah, that’s really interesting. That, you know, I think we’ve had Maxx, I believe, didn’t graduate that long ago, but several years yet, and this is something again, that kind of reiterate the fact that this has been on the United States radar, to potentially be able to ramp mining and sourcing and all that good stuff for the rare earth metals industry, they are looking ahead, and I think we should take some comfort, at least in that.
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