Chip and data center economics: utilization, yield, and power
Calculate how a fab's profit swings with utilization, the cost of a good chip, and the electricity cost of a data center.
Industry brief, with a one-minute summary: Semiconductors and electronics hardwareKey takeaways
- A fab has huge fixed costs and small variable costs per wafer. When utilization drops, profit falls much faster than revenue.
- For AI data centers, the hardest input is often not land or money but a grid connection with enough power, which can take years to secure.
- This is operating leverage. Most fab costs are depreciation and staff that do not fall when volume falls.
Key idea
A fab has huge fixed costs and small variable costs per wafer. When utilization drops, profit falls much faster than revenue. This operating leverage is why the chip industry swings between boom and bust.
Worked case
How utilization drives a foundry's profit
The prompt
A foundry in Taiwan has capacity of 1 million wafers a year. Its fixed costs, mostly depreciation of equipment, are USD 3 billion a year. Each wafer sells for USD 6,000 and has variable costs of USD 1,500. What is the profit at 90 percent and at 70 percent utilization, and at what utilization does it break even? (Figures are illustrative.)
The structure
- Profit = wafers x (price minus variable cost) minus fixed costs
- Wafers = capacity x utilization
- Contribution per wafer = price minus variable cost
- Break-even wafers = fixed costs / contribution per wafer
Working it through
1. Contribution per wafer
USD 6,000 minus USD 1,500.
Contribution per wafer (USD):6,000 - 1,500 = 4,5002. Profit at 90 percent
900,000 wafers at USD 4,500, minus USD 3,000 million of fixed costs, in USD millions.
Profit at 90 percent utilization (USD millions):900,000 × 4,500 ÷ 1,000,000 - 3,000 = 1,0503. Profit at 70 percent
700,000 wafers at USD 4,500, minus fixed costs.
Profit at 70 percent utilization (USD millions):700,000 × 4,500 ÷ 1,000,000 - 3,000 = 1504. Break-even utilization
Fixed costs divided by contribution per wafer, as a share of capacity.
Break-even utilization (percent):3,000,000,000 ÷ 4,500 ÷ 1,000,000 × 100 = 66.67
The recommendation
The foundry should protect utilization above all, because a fall from 90 to 70 percent cuts profit by about 86 percent, from USD 1,050 million to USD 150 million, while revenue falls only about 22 percent. First, each wafer contributes USD 4,500 against USD 3 billion of fixed costs, so the fab breaks even at about 67 percent. Second, this means long-term contracts and customer prepayments are worth more than a slightly higher price. The risk is that prices also fall in a downturn, making the profit drop even larger. As a next step, track the order book against the 67 percent line each quarter.
Risks: Prices usually fall in a downturn too, making the profit drop even larger; New capacity from rivals can push utilization down across the industry.
A processed wafer costs a chip designer USD 16,000. Each wafer has room for 50 chips, and 80 percent of them work (the yield). What is the cost of one good chip, in USD?
A data center in the UAE has an IT load of 100 MW running all year and a PUE of 1.3. Electricity costs USD 60 per megawatt hour. What is the yearly electricity bill, in USD millions? (A year has 8,760 hours.)
For AI data centers, the hardest input is often not land or money but a grid connection with enough power, which can take years to secure. That is why data center site selection cases start with power: how much, how soon, at what price, and how clean.
Why does a small drop in demand hurt chip makers' profit so much?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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