Semiconductors

What are they?

Semiconductors have become integral for many electronic appliances as well as for the social infrastructure that supports our everyday life. These are microscopic electronic devices, often invisible to the naked eye. Without them our lives would come to a standstill. Semiconductors possess the electrical properties of both conductors and insulators, enabling the flow or prevention of electricity at different points in time. This allows them to play an important role in equipment control and power an array of electronic devices in fields such as automobile safety, cloud infrastructure, industrial automation and defence systems, to name just a few.

Improvement in semiconductor technology over the years has ultimately made possible the explosion of information technology and digital services that we experience today. At the same time electronic devices have become smaller, faster and more reliable. Mobile phones have gone from weighing over 1kg and costing more than £3,000 in 1974 to the smartphones we have today. Semiconductor advancements have meant that Moore’s Law, (a prediction made in 1975 from former Intel CEO Gordon Moore that computer power would double every two years), has been followed to previously unimaginable levels, revolutionising the way we live and work. It is striking to think that the computers used by NASA for the Apollo 11 moon landing back in 1969 contained far less computing power than a single smartphone has today.

Furthermore, advancements in semiconductor design and manufacturing are giving rise to new technologies that promise to transform societies for the better. This will be most prevalent as computing systems move into the domain of Artificial Intelligence (AI) which has been made a reality with the marked increase in semiconductor technology, Internet of Things and large data sets that developed over the past years. The use of AI may currently be most noticeable in AI-enabled consumer home devices such as Amazon’s Alexa, but it has the potential to transform major sectors including transportation, defence and healthcare amongst many others. Innovation in semiconductors are paramount to facilitating AI growth and keeping countries at the forefront of technological advancement in an era of digital transformation. Without advances in semiconductor process technology and chip design AI would remain futuristic speculation. Semiconductors’ greatest potential lies ahead.

The semiconductor arms race

The significant growth outlook and opportunities for the semiconductor industry has since sparked fierce global competition. Complex global supply chains exist based on each country’s comparative advantage. Today the US leads in the most R&D intensive activities including electronic design automation (EDA), intellectual property (IP), chip design and advanced manufacturing equipment. Such is the importance and size of the semiconductor industry to the US that it now employs over 250,000 people while also counting as its fourth largest export after airplanes, refined oil and automobiles. Meanwhile most of the semiconductor manufacturing in terms of wafer fabrication takes place in East Asia. This is especially the case for manufacturing of the most advanced semiconductors in nodes below 10 nanometres where 92% of production comes from Taiwan and the rest from South Korea. To put this level of manufacturing precision in perspective, one inch contains 24,500,000 nanometres and one human hair is 80,000 to 100,000 nanometres wide.

Historically, companies such as Intel, Qualcomm and Texas Instruments, backed by large amounts of Government funding, meant the US was dominant in the semiconductor manufacturing space for many years. Given the capitalintensive nature of manufacturing, however, US companies increasingly outsourced this part of the production process to companies mostly found in Asia.

The US share of global semiconductor manufacturing has fallen from 37% in 1990 to 12% today. This drop is compounded by the fact that only 6% of new global capacity in development is being built in the US. China on the other hand will add about 40% of the new global capacity that comes online over the next decade and likely become the largest manufacturing location in the world. The Chinese Authorities have made clear their intention to make the semiconductor industry a strategic priority and to become the global leader going forward. The worry in upper echelons of the US government is that the trend could have significant repercussions and that the US could lose ground in the technological arms race with China. This is particularly critical for semiconductors used in US advanced defence systems.

The global structure of the semiconductor supply chain which has led to cost savings and performance enhancements is currently at risk as governments strategically look to onshore production. Political tensions between the US and China have contributed to a global chip shortage as Chinese manufacturers stockpile chips in response to US government restrictions on technology exports. It has also led to concerns in the defence community that China may at some point annex Taiwan over the semiconductor issue. The Boston Consulting Group estimate that over the next decade the industry will need to invest more than $3 trillion in R&D and capital expenditure to meet the increasing demand for semiconductors. More, not less collaboration is needed amongst governments and industry participants to make supply chains more resilient and facilitate access to these vital components across the globe.

Important companies you may never have heard of

There are a number of different publicly listed stocks that fall under the umbrella that is the semiconductor industry, many of which are exposed to different stages of the production process. Companies such as AMD and Nvidia design the chips, whereas manufacturing tends to be done by TSMC. ASML on the other hand makes essential equipment for the manufacturing process.

The global semiconductor shortage has led to greater bargaining power for the manufacturers and designers of chips as well as for those that make the specialised equipment involved in the complex supply chains. From a manufacturing perspective the industry has become incredibly dependent on TSMC which produces almost 90% of the most advanced nodes currently in production. Since the manufacturing process requires greater capital investment each time the chips get smaller (the cost of making a factory has gone from $1bn in 2000, to $17bn in 2020) many chipmakers have instead focused on design and left the production process to dedicated foundries such as TSMC.

ASML is another company deeply embedded in the supply chain whose manufacturing equipment is essential to the semiconductor industry. Its photolithography machines enable semiconductor companies to project a pattern onto the surface of the wafer in order to create a chip; this technique enables them to pack more performance into the tiny silicon pieces and contributes heavily to the continuation of Moore’s Law’s. This is the most expensive and crucial stage of the manufacturing process, which means their highly precise and reliable machines are critical.

As for the designers of chips, AMD and Nvidia are two companies which have been particularly successful in recent years. AMD was a market leader around the time of the dotcom bubble but had too much exposure to the PC market and lost market share to Intel amongst other issues. New management have executed a very credible plan and focussed on new products based on their core intellectual property in graphics, virtual reality, games consoles and datacentre that are diversifying away from PCs, and consequently driving a potential long-term turnaround at the company. Nvidia has seen a meteoric rise in its stock price over the last 10 years. It is the leader in the design and production of Graphics Processors Units (GPU), which are primarily used in PC graphics cards for gaming. They are also used in datacentres and for machine vision in autonomous driving, drones, medical imaging and robotics, all of which are driving ever increasing demand.

Finally, Infineon is a leading provider of power semis for applications primarily in the automotive, consumer electronics, industrial and security markets. On top of this the company are quickly developing into a crucial part in the transition towards greener energy usage, providing semis to makers of both solar inverters and wind turbines.

These are but a handful of companies that play a significant role in an industry that has come into the limelight given the structural and strategic significance it will have on future technological progress. Supply shortages will continue to generate headlines until investment in greater manufacturing capacity bears fruit. Yet it is the race for technological superiority in the industry that remains of most importance and will continue at pace with geopolitical tensions unlikely to subside. Semiconductors value to the 21st century may be equal to or even surpass that of that of oil to the 20th century.