The chip industry is in a constant struggle in predicting demand and that means regular chip shortages every few years and a boom-and-bust market that continues despite access to massive amounts of economic data.

I used to cover the chip industry for several news publications, for more than two decades and the same pattern of boom-and-bust cycles would repeat itself separated by four or five years. And each time it happened, chip makers vowed it wouldn't happen next time because this time their forecasts would be far more accurate. And each time they failed they said next time we'll get it right.  It's a tradition that continues to this day. 

Which makes me wonder: How bad is the chip shortage that we hear about? And just how long will it last? And can we trust predictions of a long shortage? 

Because looking back at the chip industry with a multi-decade view I would say that we'll likely see the same as we always see in the industry: a sharp rise in demand followed by an equally sharp fall. A classic boom-and-bust scenario.

For example: Just last year the Semiconductor Industry Association (SIA) released its mid-year 2020 report and it was gloomy.

"Following record sales of$468.8 billion in 2018, global sales in 2019 decreased by 12 percent to$412.3 billion". The SIA said 2020 sales would be negatively impacted by the COVID-19 pandemic with a modest rise in revenues predicted for 2021. 

But the chip market came roaring back this year and there is nothing modest about monthly growth in chip revenues of 26 percent and above, year-over-year. 

The semiconductor industry is now predicting lengthy chip shortages as chip revenues boom in 2021 -- extending into 2022. 

However, this prediction is likely just as unreliable as prior ones and the reason is that it is incredibly hard to figure out true chip demand.

It is even harder during times of shortages because customers are double and triple ordering, and trying to gain supplies through any means possible. This creates a certain level of fake demand which disappears as soon as supplies rise. It's difficult to unravel the true chip demand.

It's a big problem for the chip makers because making chips takes at least 6 months and once you've started you cannot stop. And you have to run your chip fabs at near full capacity otherwise the operating costs are unsustainable.

And because the chip fabs make massive use of scale: in terms of the largest wafer sizes and the smallest chip features -- just one of today's state-of-the-art fabs has the capacity to produce massive numbers of chips surpassing the older generations of fabs.

The economics of the chip industry require chip fabs to be continuously producing chips at near full capacity.  You cannot slow down a production line because demand has fallen. You have to keep producing chips.

The only way chip companies can cut production is by not building another multi-billion dollar fab. 

See also

• Smartphone sales are riding out the global chip shortage
• The global chip shortage is creating a new problem: More fake components
• The global chip shortage is still causing big problems for car makers
• Intel just signed a major chip-making deal with the Pentagon, and it could help the US solve its semiconductor problem

And this is why we have a chip shortage yet again. Chip companies have to get their investment timing just right because a capital expenditure of several billion dollars has to be put to work as quickly as possible. Companies can stop fab construction and resume later but they cannot stop it once it is up and running. 

And every new fab produces a massive amount more chips than prior fab generations. Productivity has advanced at around the speed of Moore's Law for more than 60 years. 

Invariably, the chip industry gets its forecasts wrong and over-invests in fab capacity and suffers a "bust" market. And chip prices plunge because of the massive abundance created by the latest fabs  -- which cannot be turned off. 

It may be tough times for chip makers, but a flood of cheap chips is a bonanza for every type of electronics company and digital device inventor. It fuels innovation and the chip miniaturization fuels performance as chips become faster, use less power, and become less expensive. And in plentiful supply.

This current chip shortage might be shorter than the chip industry expects and if they do over-invest in production then that will drive the next big chip user boom. Whatever that will be. 

This shows how the chip industry is incredibly fundamental to the health of the entire tech industry and nearly all other industries. 

Processors

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