| Hello, Ian here. U.S. President Joe Biden and other politicians have recently expressed alarm over a shortage of semiconductors. But right now, many of the smartest people in the chip world are worried about something else: a coming glut. Wall Street is peppering chip CEOs with questions about rising lead times and double ordering. I'll explain these terms in a moment, but the overall message is clear: While there have been some shortages lately, supply could overshoot longer term. Let's tackle lead times first. This refers to how long it takes to actually get a chip after you order it. The current wait across the industry is 14.1 weeks, up from about 13 weeks in January, according to Chris Rolland, an analyst at Susquehanna. Almost 80% of companies he follows have rising lead times. Broadcom Inc., Microchip Technology Inc., Diodes Inc., NXP Semiconductors NV, Xilinx Inc. and Cypress Semiconductor all posted record high lead times recently. NXP, a major auto chip supplier, saw lead times spike by four weeks in January. Anything above 14 is the "danger zone," Rolland says. Here's why: Imagine ordering something you urgently need to do your job. The supplier says you'll get it in 14 weeks. Last time, you got it in 13 weeks. This makes you worry there's a shortage, so you order more than you need to make sure you don't get caught short next time. That's double ordering. Often, you needn't have worried. There's enough to go round after all. Now you have several of these products just sitting around not being used. So you cancel or cut your next order. This is bad news for the supplier, who was expecting more orders. Turns out, most of its other customers made the same mistake you did. Now there are thousands of these products and no one to buy them. Sales drop. Financial pain ensues. Chip investors have seen this movie many times before. The industry is notoriously cyclical and the current upswing has been dramatic. Revenue across the sector rose 1.6% in (typically slow) January versus the prior month. That's first time this has happened in more than two decades and it's 11 percentage points above the typical seasonal sales pattern, according to UBS. Double ordering is probably contributing to this. ``While things appear red-hot for semis in the short term, we are growing more cautious over the long-term outlook as we believe the industry may be over-shipping to true demand,'' Rolland wrote in a recent note to investors. So why is the president of the world's largest economy so focused on this idea of chip shortages? The first answer is the auto industry, a politically powerful lobby due to all the workers employed by the sector. When Covid-19 hit early last year, carmakers panicked and cut chip orders. Then they took too long to spot a rebound in vehicle purchases by people avoiding public transport. By the time they woke up, other more important chip customers had already re-upped their orders. Automakers complained loudly in Washington. Now we have executive orders and investigations. But that won't change the fact that automakers represent less than 10% of sales for the semiconductor industry. They are at the back of the queue and will remain there for the foreseeable future. Secondly, Biden and other Western politicians are conflating the ebbs and flows of chip supply and demand with another issue: Where semiconductors are made. Most chips are manufactured in Asia, which is a potential national security risk as tension rises between China and the U.S. Increasing domestic production makes sense, but this is about shifting the location of plants not increasing the total supply of chips. This week, lawmakers have another chance to hear from people who really know what's going on in the industry. Broadcom Chief Executive Officer Hock Tan will take questions from analysts on Thursday after the company reports results. He speaks his mind more than most CEOs and almost a year ago he warned customers to order well in advance to guarantee supply. Listening to him then might have helped anticipate some of the issues politicians are focused on now. Hopefully, they will pay more attention this time.—Ian King | 
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