Semiconductors. The oil of the 21st century. In 2022 more than 1 trillion microchips were manufactured, roughly 130 chips for every person on earth. Semiconductors have taken the front seat as supply chain issues brought industries to a standstill in 2021, geopolitical tensions have increased, and AI has hit an inflection point. Although the US makes up a large part of semiconductor demand, China became the largest user of semiconductors in 2021, buying chips to the tune of $190+ Billion. Although the US still dominates in the design and equipment segments, its manufacturing capacity market share has decreased from 37% in 1990 to about 12% today1 , trailing both Japan and Taiwan. This was a result of skyrocketing manufacturing costs along with global industry competitiveness from specialized players. Taiwan and South Korea are now the top manufacturers of leading-edge chips, with Intel, who was the “King of Chips” in the 90’s and early 2000’s, a distant third.
The current flux in the semiconductor industry could provide fertile grounds for attractive investments. This industry report is meant to provide an overview of the semiconductor industry, the players in the space, and trends.
Overview
What is a semiconductor? Semiconductors are made from materials such as Silicon, Germanium, Gallium Arsenide, Silicon Carbide, and others. What has made them the cornerstone of the modern world is that the electrical conductance in these materials can be precisely controlled by the addition of “impurities”, which is called “doping”. This feature gave birth to the first “Killer App” of the Semiconductor era, the invention of the Transistor (1948), where a narrow semiconductor region sandwiched between two other regions can either modulate the larger current going through the other two regions, acting like an amplifier, or it can completely switch on/off the current, acting like a digital switch. The second “Killer App” was the Integrated Circuit, invented by the Fairchild Semiconductor Company around 1960, which gave birth to the modern method of manufacturing computer chips, with Transistors, Resistors, Capacitors, and Interconnects all part of the same Silicon chip, all built on a flat wafer – it is called the Planar Process – no more testing each one separately. Two of the Fairchild founders, Robert Noyce and Gordon Moore, then left Fairchild and founded Intel, which gave birth to the third “Killer App” of the Semiconductor Age, the Microprocessor, and Moore’s Law, which was the Big Bang, so to speak, and 50 years later here we are with Laptops, Cellphones, Supercomputers, the Internet, EV’s and AI and so many other revolutions in technology based on semiconductors.
Semiconductors today are overwhelmingly composed of super high purity silicon (by “super high purity” I mean 99.99999999999% or 11 Nines of purity). These silicon ingots are created and then sliced into 12 inch wafers, each half a millimeter thick. The surface of these wafers can be protected by laying down a layer of Silicon Dioxide, SiO2, aka Quartz in one of its many forms. This “planar process”, using Silicon Dioxide passivation is the not-so-secret sauce of modern semiconductor manufacturing. Thus Silicon became the King of Semiconductors.
To get an idea of the mind-boggling progress made in this industry, in the 1950’s, the typical transistor was 1 centimeter long! This shrank to millimeters by the late 1950’s, and then came the integrated circuit. But it took a while for the Integrated Circuit to dominate. For example, the famous IBM 360, which came out in 1964, used “modules” of discrete Transistors, Capacitors, Resistors, still no Integrated Circuits. But then came the chip containing the first microprocessor (1971), the Intel 4004 “die”, before encasing it in its “Dual inline Package”, measured 3 mm by 4 mm and contained 2,300 Transistors. Today the Nvidia H100 chip contains over 80 Billion transistors, the sides of its die measure 28 millimeters, and like all modern chips, it is built on 12” Silicon wafers. The wonders of Moore’s Law!
The activities that make up producing a chip are (1) Design (2) Manufacturing (3) Testing and Packaging. Designing a chip is solely on the software side and is done by fabless players such as Nvidia. Manufacturing is how chips are created from silicon ingots. The steps for manufacturing microchips from a silicon wafer involve 1) photolithography 2) etching 3) doping 4) deposition 5) polishing. This entire process takes up to 15 weeks from start to finish. After the chips (or dies) are cut, they need to be tested and packaged for final sale. Even though semiconductor manufacturing is atomically precise, the yield is about 60% for leading-edge chips with trailing edge chips having a higher yield of around 80%. Roughly a couple hundred to about 15k chips are produced per wafer.
Semiconductors are expensive and very light thus makes shipping parts to other countries more conducive. The industry has become a complex global interweaving of partners. Semiconductor parts on average cross-country borders about 70 times before becoming an end product. This hyper-specialization benefits in an ideal world but has significant drawbacks in a non-ideal one. The years 2020 and 2021 exposed the fragility of these supply chains. In March 2021, Renesas Electronics, a company based in Japan that manufactures roughly 30% of automotive micro-controllers, had a fire at their plant and it took 100 days to reach normal baseline production. This caused massive ripple effects in the automotive industry, bringing plants to a standstill.
By end use application, currently about 30% of semiconductors are used for mobile phones, 25% are used for data centers and IT infrastructure, 20% are used for computers, and the rest are used for automobiles and consumer electronics. The semiconductor industry revenue is forecasted to reach about $1T by 2030 as EV adoption and computational and data storage needs increase. Semiconductor costs per vehicle are expected to go $500 dollars today to over $4k dollars by 2030, an 8x increase.
Although the name “chips” is thrown around ubiquitously, it is important to distinguish the types of chips as the players and industry dynamics vary …