Semiconductor Industry
SECTION 1: SEMICONDUCTORS OVERVIEW
BUSINESS SENSE ABSTRACT
As semiconductors shrink in physical size, the industry—encompassing design, manufacturing, and sales—continues to expand, projected to reach $1 trillion by 2030, driven by the automotive, computation, data storage, and wireless industries. In 2023, semiconductor sales—the heart of all electronic devices—reached $526.8 billion, with 34% attributable to logic products used primarily in processing. Dominated by companies like Samsung, Intel, and TSMC from the South Korea, the US, and Taiwan, the industry globally shipped 1.15 trillion semiconductor units in 2021. As of 2017, the market shares of key industry sectors were memory (30%), logic (25%), microprocessors (16%), and power semiconductors (9%).
SIGNIFICANCE
Also known as chips, semiconductors serve as the brains and hearts of modern electronics, controlling and managing electric current flows. Becoming smaller, faster, and cheaper, these chips are found in computers, smartphones, appliances, medical equipment, military systems, and transportation infrastructure, among many other applications. As drivers of significant economic activity and innovation, semiconductors are critical in technologies transforming our lives, such as artificial intelligence (AI) and high-tech sensors. Consequently, supply shortages can lead to production delays across multiple sectors, resulting in billions of dollars in global economic losses.
Semiconductors serve as the brains and hearts of modern electronics, controlling and managing electric current flows.
CASE STUDY TOPICS
Semiconductor case study topics will primarily focus on supply chain resilience, exploring strategies to mitigate risks from global disruptions and shortages. Similarly, geopolitical tensions continue to present supply chain disruption risks and cause market volatility. Additionally, analyzing market trends and growth opportunities in sectors such as automotive, AI, and 5G while identifying key drivers and potential challenges will be important. Lastly, optimizing manufacturing processes and R&D investments to maintain competitive advantage and meet rising demand will be crucial for sustaining long-term industry growth.
KEY TRENDS & EVENTS
1. 2022 Chips and Science Act - The CHIPS and Science Act, signed into law in August 2022, allocates $280 billion primarily for semiconductor research and manufacturing in the U.S. It includes $52.7 billion for chip manufacturing subsidies and investment tax credits, alongside $13 billion for semiconductor research and workforce training.
2. AI - In 2023, the market for chips powering generative AI models surged while the demand for traditional chips and memory prices declined. Leading manufacturing hubs saw significant growth in this sector, positioning gen AI chips as a key growth area, expected to contribute over US$50 billion in sales, representing 8.5% of the total chip market for 2024. As such, gen AI chip sales could reach US$400 billion by 2027.
3. Geographical shift - The majority of global semiconductor assembly and testing (AT) capacity is concentrated in Asia, with Mainland China and Taiwan dominating the OSAT market. Thus, the US and Europe are aiming to expand chip fabrication by strengthening their back-end capacity to streamline supply chains and prevent delays. IDMs in the U.S. and South Korea are enhancing packaging capabilities through their assembly operations to maintain competitive product performance and flexibility.
4. Sustainability driven by increased power demand – The semiconductor industry is increasingly focused on sustainability, with companies setting goals to produce environmentally-friendly products that reduce power consumption and carbon footprints. Dedicated engineering teams at companies like Intel and Applied Materials are driving sustainability initiatives across equipment, processes, and operations. There's a growing emphasis on sustainable procurement and digital technologies to optimize efficiency and reduce carbon emissions throughout the semiconductor manufacturing process.
INFLUENCES AND HEADWINDS
1. Critical minerals: Critical minerals are essential components of semiconductor production, and as such, their price fluctuations and supply chain disruptions can influence semiconductor production and prices.
2. Renewable energy technologies: Chips optimize energy efficiency across all aspects of energy generation, transmission, and storage in renewable systems. As global decarbonization efforts intensify, semiconductor technology remains important for achieving efficient and sustainable energy infrastructure worldwide.
3. Wireless Communications: The semiconductor industry faces increasing demand driven by the expansion of 5G technology and smartphone upgrades, especially in mid-tier segments across emerging markets.
4. Automotive Industry: Demand for semiconductors in vehicles is set to triple by 2030, fueled by trends in autonomous driving and electric mobility, potentially representing up to 15% of semiconductor demand and driving significant industry expansion.
5. Data Storage: Growth in the computation and data storage market, anticipated at 4 to 6 percent, is bolstered by rising needs for servers supporting AI and cloud computing applications, underscoring continued semiconductor demand and market expansion opportunities.
CASE STUDY
Integrated device manufacturer (IDM) vs. Pure Play Foundry: A Case Study on Samsung and TSMC
As semiconductor manufacturers, Samsung Electronics (KRX: 005930, 005935; LSE: SMSN; LuxSE:SMSEL) and TSMC (TWSE: 2330; NYSE: TSM; LSE: OLCV) have adopted different business models that have significantly influenced their market positions.
Samsung, as an Integrated Device Manufacturer (IDM), is vertically integrated and handles all processes in manufacturing semiconductors, from design to production. This approach allows Samsung to maintain control over the entire production process, ensuring quality and consistency. As a broad electronics manufacturor, Samsung’s strategy has proven successful for its own business model, with the company regaining its number one position in global smartphone sales in Q1 2024. In terms of semiconductor sales, Samsung remained the market leader in Q3 2021, recording a sales volume of about $22.32 billion. Samsung’s customers are primarily end-users who purchase their smartphones and other electronic devices.
On the other hand, TSMC operates as a pure-play foundry, focusing solely on manufacturing chips based on the designs and specifications of its customers. This model allows TSMC to serve a wide range of clients without competing with them. TSMC has been successful in maintaining its leading position in the foundry segment of the global semiconductor industry, accounting for 26% of the worldwide semiconductor market excluding memory in 2021. TSMC’s customers are primarily fabless companies that design their own chips, including major tech companies like AMD, Apple, Broadcom, and Nvidia.
SECTION 2: SEMICONDUCTOR INDUSTRY FINANCIALS & METRICS
REVENUE DRIVERS
1. Direct sales: Semiconductors sold directly to manufacturers of consumer electronics, automotive industry, and industrial equipment.
2. Foundry contract manufacturing: Companies like TSMC and GlobalFoundries operate as pure play foundries, manufacturing chips based on designs provided by fabless companies such as Nvidia.
3. Licensing and royalties: Companies such as ARM Holdings generate revenue by licensing their semiconductor IP to other companies, who then incorporate these designs into their own chips.
4. Long-term supply agreement: With major customers such as Apple, companies many negotiate a long-term contract ensuring a steady revenue with agreed-upon quantities and pricing.
5. Custom design and development: Application-Specific Integrated Circuits (ASICs) are custom-designed chips for specific applications or customers. Or System-on-Chip (SoC) combines multiple functions on a single chip tailored to needs of a particular customer.
6. Component sales: Selling individual semiconductor components such as transistors, diodes, and capacitors.
7. Semiconductor software and tools: Selling software tools for chip design, simulation, and testing, used by other semiconductor companies.
COST DRIVERS
1. Research and development (R&D): For semiconductor manufacturing companies, significant investments are regularly made in R&D to keep up with demand from other arising technologies and to stay competitive in the market.
2. Fabrication plants (Fabs) and equipment CapEx: Building and maintaining a semiconductor fabrication plants while procuring and upgrading manufacturing equipment requires major continuous investments.
3. Materials and supplies: Raw materials, such as silicon wafers and critical minerals, as well as consumables can be major cost drivers depending on price fluctuations and global geopolitics around minerals.
4. Energy and utilities: Costs associated with running high-precision equipment and the use of ultra-pure water (UPW).
5. Logistics and supply chain: Especially in light of disruptions in global supply chain and logistical challenges, costs associated with transportation and inventory management can be difficult to predict.
6. Labor costs: High salaries for skilled workforce and continuous training and development programs for the workforce.
7. Quality control and testing: Costs associated with yield management to reduce defects and maintaining high standard of semiconductors
8. Compliance and regulatory: Compliance with health, safety, and environmental (HSE) regulations and standards across semiconductor manufacturing supply chain, especially in light of ESG sustainability trends.
9. International Intellectual Property (IP): licensing and patent filling and protection across different legislations globally with various stakeholders involved can be important cost drivers.
10. Sales and marketing: Costs for marketing and promotional activities as well as commissions paid to distributors for selling semiconductor products.
KEY TERMINOLOGIES & METRICS
1. Bill of Materials (BOM): A comprehensive list of materials, components, and parts needed to manufacture a semiconductor product. It is crucial for cost estimation and supply chain management.
2. Capital Expenditures (CapEx): Investments in facilities, equipment, and technology required for semiconductor manufacturing. High CapEx is characteristic of the industry due to the need for advanced and expensive machinery.
3. Design Win: A term referring to the selection of a semiconductor company's chip by an OEM (Original Equipment Manufacturer) for use in its product. This is critical for revenue generation and market positioning.
4. Die Shrink: The process of reducing the size of a semiconductor die, typically by moving to a smaller manufacturing process node. This can improve performance and reduce costs.
5. Fabless: Companies that design and sell hardware devices and semiconductor chips but outsource the fabrication (or "fab") to a specialized manufacturer. Examples include Qualcomm and NVIDIA.
6. Integrated Device Manufacturer (IDM): A company that designs, manufactures, and sells its own semiconductor products. Examples include Intel and Samsung.
7. Moore's Law: An observation stating that the number of transistors on a microchip doubles approximately every two years, leading to performance improvements and cost reductions.
8. Node (Process Node): Refers to the technology level of a semiconductor manufacturing process, often measured in nanometers (e.g., 7nm, 5nm). Smaller nodes typically mean more advanced and efficient chips. While in 2010, process nodes was 28nm, in 2024, it decreased to 2nm.
9. Pure-Play Foundry: Companies that focus solely on manufacturing semiconductor chips based on the designs of other companies (fabless companies). Examples include TSMC and GlobalFoundries.
10. Tape-Out: The final phase of the chip design process, where the design is sent to the fab for manufacturing. It marks the transition from design to production.
11. Yield:The percentage of functional devices produced on a wafer during semiconductor manufacturing. High yield rates are critical for cost efficiency and profitability.
SECTION 3: SEMICONDUCTOR INDUSTRY P&L REVIEW
Disclaimer: The contents of the following report are provided solely for reference purposes and should not be construed as providing any form of advice or recommendation. This report is not intended to substitute or replace any official documentation. For comprehensive and authoritative information, it is recommended that you consult the official reports issued by the respective companies.
SOX Index (Exchange capitalization-weighted index composed of 30 largest U.S. companies involved in semiconductors) vs. Global semiconductor supply shortages and price pressures
Source: S&P Global
Producer Price Index by Industry: Semiconductor and Other Electronic Component Manufacturing (in USD).
Source: U.S. Bureau of Labor Statistics
TSMC | Consolidated Statements of Comprehensive Income (partial)
(in thousands of New Taiwan Dollars, Except Earnings Per Share)
Financial Statement (2023 vs. 2022)
Source: TSMC 2023Q4 Consolidated Financial Statements
Market cap as of July 5, 2024: $800.95 billion
Intel Corporation | Consolidated Statements of Income (partial)
Financial Statement (2023 vs. 2022)
Source: Intel 2023 Annual Report
Market cap as of July 5, 2024: $167.44 billion
NVIDIA Corporations and Subsidiaries | Consolidated Statements of Income (partial)
Financial Statement (2023 vs. 2022)
Source: Nvidia Corporation 2023 Annual Report
Market cap as of July 5, 2024: $3.10 trillion
Questions for the readers:
1. Given the concentration of semiconductor assembly and testing capacity in Asia, how can companies like Samsung, Intel, and TSMC mitigate risks associated with geopolitical tensions and supply chain disruptions? What strategies can be employed to enhance supply chain resilience and ensure stability in semiconductor production and distribution?
2. As the semiconductor industry increasingly focuses on sustainability, what specific measures can companies take to reduce their carbon footprints and power consumption while managing costs effectively? How can advancements in semiconductor manufacturing processes contribute to both environmental sustainability and economic efficiency?
3. With the projected growth in demand for semiconductors in the automotive, AI, and 5G sectors, how should companies prioritize their R&D investments and manufacturing optimizations to maintain a competitive advantage? What key market trends and challenges should be addressed to capitalize on the expanding semiconductor market and drive long-term growth?
SECTION 4: VIDEO REFERENCES
For your further understanding of the global semiconductor industry, we recommend the following videos:
The race for semiconductor supremacy | FT Film
How Nvidia Grew From Gaming To A.I. Giant, Now Powering ChatGPT | CNBC
Sources (other than hyperlinked):
1. https://www.bls.gov/mxp/publications/industry-pamphlets/semiconductor-industry-facts.htm
