What does labor shortage in semiconductor means to the world?

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In my blogpost back in June 2021 « Capital is not the problem in building semiconductor fabs », I pointed out that access to highly skilled labors/slaves was a more critical issue than capital in the semiconductor industry today.

Recently the Wall Street Journal finally ran a piece « Chip Makers Contend for Talent as Industry Faces Labor Shortage », in which it described the problem of insufficient supply of qualified workers as the supply-demand gap of chips continues to rise.

Cerebras’ wafer-scale AI chip announced in June 2021 contains 2.6 trillion transistors. (Source: AnandTech)

Labor shortage everywhere

Today it seems to be that labor shortage is everywhere. The logistics industry complains about lack of labors willing to work boring jobs in the warehouses and the trucks. The food industry is having trouble filling the production lines with expression-less workers slicing off a chicken wing here and a duck leg there. Factories in Shenzhen and Dongguan find it harder and harder to attract young people to work a 12-hr shift even if the salaries they offer are still better than what these people could earn in the inland countryside hometowns. Even the internet companies complain about not having enough talented software engineers despite (or exactly because of) the billions of dollars of VC money pumped into them.

Now we’re talking about labor shortage in semiconductor industry. I guess 2022 is already off to a good start on top of carrying a huge Omicron wave over from 2021.

But labor shortage in different industries and geographies are very different in their roots and implications.

Those jobs in the warehouses, on the truck driver seats and in the food-processing factories, they have been expected to be replaced eventually by robots and more AI-driven automation systems. Labors don’t want to take up those jobs not just because of low pay and boredom. They also probably don’t want to get on a career path that is doomed to be cut short anytime.

Factories in China are losing their attractions to young and cheap labors from inlands as more and more these young bloods grew up with smartphones and internet on their finger tips and don’t want to labor away day in and day out at production lines where even the toilette time is regulated. And also there’s the one-child policy the effect of which is finally catching on.

On the other hand, software companies finding it hard to recruit talents (at the prices they’re willing to pay) mostly because the number of software companies exploded over the past decade, together with the exponential amount of VC money pumped into the ecosystem. The supply of software engineers definitely are growing by numbers faster than any other engineering sector as high-pay jobs await them coming out of school. It’s just the demand has been growing even faster (hint: at the speed of the Fed printing money).

But when it comes to the labor shortage of the semiconductor industry, there’s actually a very simple answer: the low valuation multiples of the vast majority of semiconductor companies (excluding a few red hot exceptions such as Nvidia.)

The not-so-rosy story of semiconductor valuation

Below is a quick and dirty market cap over TTM revenue multiples of some of the most dominant and successful semiconductor companies as of today:

  • TSMC : 11.2x
  • Global Foundry : 6.7x
  • Xilinx : 15.2x
  • Intel : 2.8x
  • AMD : 11.6x
  • Qualcomm : 6.2x
  • Broadcom : 9.9x
  • Mediatek : 4.1x
  • Nvidia : 29.4x

All the above mentioned companies are leaders in their respective domains, if not monopoly or duopoly. However, note that other than Nvidia, who’s leading far ahead in the AI race, none of these leaders has a multiple that’s above 20x. In fact, only TSMC, Xilinx, AMD and Broadcom are able to hit the double-digit level. All others are single-digit, with Intel dropping all the way down to 2.8x, close to the infamous 3x curse.

All these semiconductor leaders rely on highly educated and experienced electrical engineers, chemical engineers, physics engineers, mechanical engineers — and yes, software engineers — to continue pushing the envelope of semiconductor chips, whether it’s in process technologies or chip design. We’re talking about masters & Ph.Ds with years and decades of experiences working 10–12 hours per day to provide you the latest CPU, GPU, 5G and WiFi/Bluetooth chipsets.

But all those collateral brain powers and experiences in some of the most ridiculously difficult technological challenges in the human history, you end up getting a single-digit multiple valuation, if not the 3x dirty word.

It’s like someone finally conquered K2 after years of training and attempts, and the reward is a Blackberry phone that just went out of service recently.

How is that related to the labor shortage in the semiconductor industry, you ask?

Well, very simple. The lower market valuation the more difficult it is to pay higher compensation to attract talents.

And I’m not even saying this based on conjecture. I saw it with my own eyes. In the year I left Silicon Valley (and subsequently the semiconductor industry), 2012, I saw some of the best semiconductor engineers in my field with 10+ years of working experiences making $150–200k annually. At the same time, all the VC-sponsored dating app or e-commerce startups are lining up outside the campus of Standard University offering $300k packages to pre-experienced students coming out of the Computer Science master programs.

That’s 2012. It has gotten even more dramatic in the decade afterward, thanks to the crazy multiples that SaaS and other pure software companies are getting both in private rounds (by VCs) and public markets.

When Google and Apple started headhunting some of the best semiconductor talents away from Qualcomm and Broadcom in the later years, the salaries have increased quite a bit for the semi people. But the software folks are getting even fatter packages easier and faster.

This eventually propagated backward to the students picking their subjects in universities: why would anyone want to spend 6–10 years in a dirty lab, wearing a dirty white coat and staring at all kinds of clumsy instruments, before landing a job at $150k annually which immediately inserts him/her back into a bigger lab wearing a slightly cleaner white coat and staring at all kinds of newer but still clumsy instruments, when he/she could just stay in front of a shiny Macbook Pro throughout the entire college and grad school years in hoodies with Beats Audio headphones on the head, and continue to do the same coming out of school at yet another Web3/Metaverse startup funded by A16Z with slightly more expensive hoodies and Sennheiser headphones on the head?

So what happens if the talent gap in semiconductor industry is never closed?

Honestly I don’t know. All I know is the gap is probably never gonna close as I do not see the capital market falling back in love again with an industry with more and more technical challenges yet never able to generate reliable recurring revenues.

And ultimately nothing can grow exponentially forever, not even the miraculous Moore’s Law. If the semiconductor industry would be capped by the available amount of talent (instead of capital) and slow down eventually, then I guess that’s it. And if that means an eventual slow-down of the software industry as well, then I would also say that’s it. You will continue to see “pundits” calling out for this trend to be reversed but I’m sorry, the ship has sailed.

On the bright side, maybe the day we no longer need to itch about buying a new iPhone every 2 years is not that bad, right?