The price of chipsIt’s shaping up to be a big week in the world...

	The price of chips

It’s shaping up to be a big week in the world of chips. Intel Corp. will report its full-year earnings for 2021 on Wednesday, and may give more details on its recently announced $20 billion plan for new factories in Ohio. And Samsung Electronics Co., which will release financial results Thursday, is expected to unveil a huge budget increase for 2022.

Politicians have been celebrating the money flowing into chip production. In Ohio, local officials were quick to claim credit for Intel’s arrival. Chief Executive Officer Pat Gelsinger said the state had been very competitive in offering incentives to lure the multibillion-dollar investment in the face of competition from as many as 40 other possible sites. Meanwhile, the White House lauded Intel’s announcement and cited it as an example of the Biden administration's action on chip shortages.

But accolades aside, how good will the new surge of chipmaking really be for the economy?

On one hand, cheap chips have been an economic boon for years. Throughout the technology’s 50-or-so year history, semiconductors have been a counterweight to inflation. Production technology has delivered exponentially more computing capabilities without a corresponding run-up in prices. Fierce competition and efficiency have kept the costs stable for chip buyers, who have mostly been able to play suppliers off against each other.

Intel is a good example: For years the company has had margins over 60%, a remarkable level for a manufacturing company. That was because its competition struggled to match its best products. But in the last couple of years, Nvidia Corp. and Advanced Micro Devices Inc., helped by Taiwan Semiconductor Manufacturing Co.’s production, have competed more effectively—and Intel’s profitability has suffered. While its customers have had a better set of choices, Intel lost pricing power.

Today, though, pandemic-driven shortages have exposed a different set of pricing realities. Chip buyers are now forced to enter into long-term contracts they can’t cancel. Even Apple Inc. has had to pay extra for components it can’t get enough of. And after years of boom-and-bust cycles, chip industry CEOs are enjoying the new stability. As Ampere Computing CEORenee Jamestold us, prices are not going back down.

There’s other bad news for the rest of the economy: Intel’s move into the industrial heartland of the U.S. won’t boost production until the plants come online in 2025, a reminder of the length of time that it takes get a plant up and running. The impact of TSMC’s and Samsung’s spending will come with a similar lag.

Plus, much of the new spending is for a type of chip—absolute state-of-the-art microprocessors—that’s not in short supply. The hold-ups right now are far more acute in simpler products such as power convertors and analog chips that are made in older plants. Naturally chipmakers are reluctant to invest in facilities that are closer to obsolescence, and the industry throughout its history has tended to build its older products at hand-me-down locations, rather than brand-new facilities.

There’s been a flurry of headlines about new plants, giant spending and self-congratulations for taking action. But the truth is that the chip industry isn’t in a particular rush to help the broader economy.