Can we build more Fabs please?
Real men have Fabs — Jerry Sanders (AMD founder)
I must admit I had the unique privilege back in the day of having a dad who worked in a chip factory. I am not joking!! Well actually, it wasn’t really a fab; it was an assembly unit.
This was long before I knew what a fab really was or what it did. My dad used to return home frequently stressed from his graveyard shift, worrying himself into a sweat about unmet production targets. The pressure was intense; it eventually took a toll on his health.
On one annual company day, he took us to the factory, where we could see the equipment from outside the glass window. I couldn’t care less, being a 12-year-old back then. I had no idea that the output of such factories, called chips, would in a few decades, transform the world we live in.
For the uninitiated, a fab, or fabrication unit, is where microprocessors are produced. Those tiny little chips that power most of the electronic gadgets we use today are at the center of our world, although they remain hidden in plain sight.
As brilliantly depicted by Chris Miller in a soon-to-be-classic book, Chip Wars, the West tried to hold on to the fab industry until economies of scale from the far east entered the fray and almost unintentionally laid the foundations for the rise of the behemoth TSMC (Taiwan Semiconductor Manufacturing Company).
For the past 2 decades, while the world was happily embedding chips into newer and more modern devices such as fridges, cars, headsets, etc., a supply chain began to appear running from the West through the Netherlands, making a critical pit stop at Taiwan before its final destination in the world’s factory, China.
Our gadgets were all happily lapping up from this chain until the pandemic and a few large storms in America disrupted supply. In 2021, the supply chain for chips cracked, causing a slowdown in production. Automobile companies, even Vanguards like Tesla, had to step on the breaks. If chips couldn’t ship, cars wouldn’t roll.
So governments vowed in secret that they would never again be held hostage to this supply chain.
More Fabs Now!!
Shortly afterwards, Intel, GlobalFoundries, and even a few new entrants were allocating budgets for spending billions of dollars on setting up fabs in different countries. Intel, still reeling from its GPU slumber, is playing catch up with both NVIDIA and AMD, having forgotten that they are in a world now where their own mantra of “Only the paranoid survive” applies!!
Taking a step back, does it really make sense to pour billions of dollars into building new fabs just because a best in class supply chain that covered the planet almost invisibly failed a new generational virus test?
In a different school of thought, Dr. Raghuram Rajan, in an interview recently after his latest work, Breaking the Mould, doesn’t seem to think so. The cost of building a fab, for instance, could set any entity (private or government) at least back by USD $2 billion. If one were to consider localizing the entire ecosystem, that amount could easily double or triple.
The simple logic here is that the amount of capital allocated is fraught with the following risks: -
- Economies of scale: The scale of the existing semiconductor supply chain globally allows for the production of chips at an affordable price. Undercutting the supply chain locally may not achieve economies of scale at the outset. In fact, it may take some time before chips produced locally match the global standards of price or quality.
- Extended R.O.I. : — USDS $2 billion is a lot of investment to lock in for a period of 2–3 years (the time it takes to set up the fab ecosystem) before seeing any return on investment. That amount could instead be used in other sectors that would yield more immediate as well as tangible results.
While both sides have their valid share of points, a critical reason that we have seen an increase in the number of planned fab units in areas across the world that may not prove economical (US and Europe, for instance) is due to national security. While the chip supply chain is now back to normal and chugging on smoothly, nations are not sitting by idly waiting for the next crisis to unfold.
Fabs would need extensive government support (financial and political) to operate. This in itself would act as a filter for the number of nations or companies around the world that would undertake such an operation. Initially, the operations will serve the local markets in the areas where they are set up. The pie at this juncture is large enough for everyone.
Investments in more fabs across the world (albeit extravagant) also democratize the entire chip supply chain. With more skilled individuals working on this technology across borders, they will eventually discover more productive and innovative ways of doing the same thing, thereby reducing cost and eventually lowering the barriers of entry to this critical industry, which is now a members-only club.
