No it’s not an easy fix. Manufacturers don’t have a good pulse on long term demand. The he capex to spin up a new manufacturing plant is significant. Especially with the recency of Covid where some folks did get caught with their pants down and over invested during the huge demand boom.
I don’t quite follow the narrative like yours about nation states and investors. There is certainly an industrial bubble going on and lots of startups getting massive amounts of capital but I here is a strong signal that a good part of this demand is here to stay.
This will be one of those scenarios where some companies will look brilliant and others foolish.
Smart manufacturers will sell 'hard drive futures'. Ie. "Give us $100/drive now for 100k drives for delivery in march 2028".
These contracts are then transferrable. The manufacturer can start work on a factory knowing they'll get paid to produce the drives.
If the AI boom comes to an end, the manufacturer is still going to get paid for their factory, and if the AI company wants to recoup costs they could try to sell those contracts back to the manufacturer for pennies on the dollar, who might then decide (if it is more profitable) to halt work on the factory - and either way they make money.
That only works out if there are enough investors willing to pay for those futures. If the new factory can make a billion drives but they only have 2 of those futures contracts sold (that is 200k drives) they don't build the factory. Remember too if they sell those contacts they are on the hook to deliver - if it is just investors they will accept the street value of 100k drives in 2028 but some of the people might be buyers demanding physical goods.
Every year a few farmers realize they are contracted to deliver more grain than they have in their bins and so have to buy some grain from someone else (often at a loss) just to deliver it. This isn't a common problem but it happens (most often the farmer is using their insurance payout to buy the grain - snip a very large essay on the complexities of this)
> If the new factory can make a billion drives but they only have 2 of those futures contracts sold (that is 200k drives) they don't build the factory.
But the AI companies are flush with cash and trying to buy everything, right? Why wouldn't they buy up as many futures contracts as the fab company needs to justify more fabs?
> Every year a few farmers realize they are contracted to deliver more grain than they have in their bins and so have to buy some grain from someone else (often at a loss) just to deliver it.
This is most commonly because they sold a futures contract for X bushels expecting to grow 2X but 75% of the crop failed and they only have 0.5X.
Semiconductor fab yields aren't as susceptible to how much it will rain next year and the companies generally have a pretty good idea of what their yields are for a given process node.
That is the question - will those ai companies buy the contracts
edit: actually it is worse - who else isn't buying contracts - if they build new capactity on contracts and ai collapses the existing users will take up the contracts but the old capacticy is unused.
If they build the new fabs and AI collapses then they still got all the AI companies' money because they prepaid. The current market price of chips is then going to crash, but that's what happens when AI collapses regardless. Might as well sell them five years worth of chips rather than two years worth of chips before the cash cow dries up.
Meanwhile, the fab companies want to think about what happens if AI collapses, but the AI companies don't. What do they care if they get screwed on a contract the day after they go bankrupt regardless? So offer them a contract where they get screwed if they go bankrupt, e.g. prohibit them from using any of the hardware for anything but AI for five years. Then the hardware is locked into AI stuff regardless of whether AI dries up and you can still go sell the rest of the chips that aren't to PC OEMs etc.
I don’t think the math maths. The pay back for a new plant is minimum 7 years and that is not accounting for the time to build it. I suspect nobody is buying a 10 year forward purchase agreement.
The bankruptcy courst are likely to see that as an unreasonable contract terms and call it void. See a lawyer for what they really can do of course but contract terms have to be reasonable.
Can you provide some solid examples of companies doing this in an industry with high capex? Yes futures exist but largely in commodity businesses. Because what you described sounds more like pre-purchase agreements which already exist. To have a futures market you would need investors and a product that is more of a commodity and not something highly engineered.
You are also forgetting that the payback period on a plant is not a single year, it will be over many years and most likely no buyer is wanting to arrange purchasing that far out.
I don’t see how what you described sounds is set in reality even for “smart manufacturers”.
I don’t quite follow the narrative like yours about nation states and investors. There is certainly an industrial bubble going on and lots of startups getting massive amounts of capital but I here is a strong signal that a good part of this demand is here to stay.
This will be one of those scenarios where some companies will look brilliant and others foolish.