The global semiconductor industry is projected to be worth over US$1 trillion, with an average of 6-8% growth a year, by 2030. This year alone, semiconductor growth is expected to increase 16.3%, to reach a record value of US$646 billion.
It’s huge growth, but a value that is dwarfed by the importance of semiconductors — or microchips — to the modern, global economy. Between 1995-2015, semiconductors are estimated to be directly responsible for an increase in global GDP of US$3 trillion, and another US$11 trillion in indirect growth.
Recent microchip shortages, supply chain issues and geopolitical tensions have highlighted the importance of the industry to governments across the world, offering investors an early opportunity to buy into a growing market that is about to undergo a radical transformation.
Firstly, why are semiconductors so essential?
Semiconductors are the core microchip — or, electronic brain — in almost every modern technological device: from smartphones to cars, fighter jets to data storage, robots to MRI scanners. You would not be reading this on an electronic device without them.
Computing power using microchips increased one trillion times from 1965-2015, with mass production getting faster, smaller, cheaper. And now they promise to revolutionize modern life again as the driving force behind quantum computing, automated cars, 5G, advance wireless networks and artificial intelligence (read our report on AI investment).
“The global semiconductor industry is undergoing significant change as supply tries to play catch up with soaring demand for the microchips and competition for the supply chains.”— Anthony Milewski, The Oregon Group
The process, from design to mass production, for semiconductors can take up to four months. Using facilities with air 10,000 times cleaner than the outside air, robots delicately superimpose light to create hundreds of layers of electronic circuits on a silicon surface. To give an idea of the scale of the work: a microchip the size of a quarter will include tens of billions of transistors.
We won’t get too deep into the science here (if you’re interested, we recommend this slideshow by ASML), but it is essential to have a basic understanding of the complex nature of semiconductors to understand the market — and how, as an investor, you should approach it.
The US accounts for nearly 50% of global market share in semiconductors, leading in research and design, but 75% of the world’s semiconductors are made in Asia — including assembly, testing and packaging.
Taiwan is critical, accounting for 64% of the world’s semiconductor manufacturing and up to 92% of global production of the most advanced semiconductors (the other 8% is made in South Korea). In comparison, US manufacturing capacity has fallen from 37% in 1990 to 12% in 2022, with no advanced production.
The most important company is the Taiwan Semiconductor Manufacturing Company (TSMC) which, for example, is the exclusive chip maker for Apple, as well as partnering with Qualcomm and Nvidia.
It is no understatement to call both the country and company critical to the modern, global economy.
But the highly concentrated nature of the industry means there are over 50 points across the supply chain where just one region holds over 65% of the global market. Any disruption, from natural disasters, economic crisis or geopolitical conflict, has the potential to create significant problems in supply chains. And, a single microchip can represent the sale of an electronic device worth tens, maybe hundreds of thousands of dollars.
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Three main events have shaken the market.
In 2020, the US began to restrict sales of American semiconductor technology to Chinese companies, such as Huawei which crippled it’s smartphone business.
The global pandemic created supply chain disruption as countries locked-down their economies. According to Deloitte research, the chip shortage between 2020-21 meant missed revenue of over US$500 billion in the world’s economy.
Then Russia invaded Ukraine and, in February 2022, the US banned the sale of semiconductors to Russia.
These events exposed the dependence of many countries on a key strategic technology for national economies, infrastructure and security, that is offshored. In particular, both the US and China are urgently reevaluating their position.
China, as part of their current 14th Five Year Plan, is investing heavily with subsidies and procurement preferences to boost their semiconductor independence. In 2020, China’s semiconductor industry grew at a record 30.6%, with US$39.8 billion in sales, up from US$13 billion in 2017. By 2024, 31 major semiconductor factories are planned to be built. And, just this week, Chinese chipmaker Yangtze Memory Technologies Co (YMTC) unveiled a new microchipwith the highest bit density, reportedly 232-layers, in the company’s history.
But the US is not standing still.
President Biden has, this year, signed into law the bipartisan Chips and Science Act, providing US$52.7 billion in subsidies for the US domestic semiconductor industry. Of note: any company that accepts federal cash must agree not to make any new high-tech capacity investments in China.
In Europe, adopted in February 2022, their own Chips Act promises €43 billion (US$43 billion) of public and private investments to increase the continent’s global market share from 10-20% by 2030.
In Japan, last year, the government approved 774 billion yen ($6.8 billion) to support the country’s domestic semiconductor industry.
The global semiconductor industry is undergoing significant change as supply tries to play catch up with soaring demand for the microchips and competition for the supply chains.
But it will not happen overnight. There are often only a small number of companies that have the necessary equipment to process raw materials and create specialized parts, such as valves and lenses, as well as the authorization to allow the parts to be used in military hardware. It can take years, if not decades, to set up new facilities.
And, as countries compete for raw materials and essential parts to be self-reliant, so problems in supply chains are compounded.
Meanwhile growth is charging ahead. It’s estimated 70% of growth in the semiconductor industry will be driven by just three industries: automotive, computation and data storage, and wireless.
McKinsey estimates the automotive industry could be up to 15% of demand by 2030, from 8% in 2021. Computation and data storage could drive up to 6% growth as the market for artificial intelligence and cloud computing expands. Smartphones and 5G will continue to drive the growth for wireless.
Industry leaders themselves are confident in growth, with 95% in a recent survey believe growth will continue despite global economic headwinds — with 34% expecting growth of over 20%.
“Recent microchip shortages, supply chain issues and geopolitical tensions have highlighted the importance of the industry to governments across the world, offering investors an early opportunity to buy into a growing market that is about to undergo a radical transformation.”— Anthony Milewski, The Oregon Group
There will be volatility.
The nature of the transition itself is disruptive.
A recession would temporarily hit sales of electronics.
Some analysts believe supply chain issues could continue into 2023. And these will be compounded as countries disrupt and compete for existing raw materials and supplies.
There is also an ongoing, significant challenge in finding high-tech talent. A report by Deloitte suggests a talent shortfall of about 300,000 workers in 2021, a number projected to fall only slightly to 250,000 by 2022. As design and manufacturing expands into new regions, both supply and talent will be brought online. But this will take years to build and train.
Despite almost every major economic region competing for investment with new subsidies, we project the US and China will dominate the marketplace in the next few decades. But raw materials and supplies will continue to be sourced from across the world as it is next to impossible to onshore the whole process. So — barring any seismic geopolitical events — Taiwan will continue to be the dominant player in global manufacturing until at least 2030.
There are two main ways to gain exposure: design and production.
In China, major tech companies such as Alibaba, Baidu, HiSilicon, Semiconductor Manufacturing International Corporation are some of the biggest players in the market across R&D and manufacturing. Even electronic companies, such as VIVO are investing in semiconductor firms and expanding into creating their own microchips.
In Taiwan, the obvious choice are the major manufacturing companies: Taiwan Semiconductor Manufacturing Company, ASE Technology, AU Optronics. In particular, TSMC is investing US$44 billion this year, including US$12 billion to build a wafer plant in Arizona, US.
In the US, most of the major players are set to benefit from the latest Chips Act. In particular, Intel could see over US$10 billion in subsidies, and has struck a partnership with Brookfield Infrastructure Partners to develop a US$30billion semiconductor fabrication plant in Arizona, as well as expanding operations in Ohio and New Mexico; Texas Instruments Inc is set to invest US$30 billion to build four new manufacturing plants; Micron Technology Inc is set to invest US$40 billion in the US by 2030.
There are hundreds of companies producing specialized parts that also offer exposure to the market. And, as highlighted earlier, due to the equipment and authorization needed, often have little competition on the immediate horizon. In particular, this includes producers of fluoropolymers that are essential to ensure pipes, pumps and valves are strong enough to handle the chemicals needed, whilst also maintaining the ultra-high standards of purity.
Two of the most important players are The Chemours Company (NYSE:CC) in the US and Daikin Industries in Japan (6367.T-JP:Tokyo Stock Exchange).
The semiconductor industry is set to go global. The Oregon Group will be keeping an eye on both the macro and micro, so stay subscribed.