Friday, May 20, 2011

Tail Risk in the Semiconductor Business

For some bizarre reason the semiconductor business is drawn to areas that are prone to earthquakes.

Why do they do this? It's a question that has been asked time and time again but no one seems to have an answer.

About a month after the Japanese earthquake/tsunami Bill McClean of IC Insights, (one of my favorite and most accurate semiconductor industry analysts) released a research bulletin that summarized IC (integrated Circuit) manufacturing capacity located in seismically risky areas. What's staggering about this is that 90% of the world's pure play Foundry business, which includes companies like Taiwan Semiconductor and United Microelectronics, have their manufacturing capacity situated in risky areas.

From the report: "The bottom line was that for every month the IC fabs in Hsinchu (home of several major foundries) were shut down, the electronic system industry would lose at least $10 billion in sales!"

The Foundry business is not alone. A great percentage of the semiconductor industry is located in high-risk regions:

Here are a few more comments from the bulletin:

"...In 2010, almost two-thirds of worldwide IC industry capacity was located in seismically active areas."

"Ultimately, all that really can be said about the ability to predict devastating natural disasters is that everything is just “fine” until one day it isn’t. However, while these tragic events are impossible to predict, they are not impossible to plan for."

The shocks we have experienced from the leverage in the financial world have been described as "Tail Risk" . Events that you think couldn't possibly happen, happened. Obviously the financial markets are not alone. I realize I am stretching the definition a bit but it seems to me members of the electronics food chain have embedded their own tail risk.

Even if you disagree with me calling this tail risk, you have to admit that things like this speak volumes about human nature….. Will we ever learn?

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