Semiconductor chips are the fundamental building blocks of modern electronics. These chips lie at the heart of our daily existence, empowering the devices and systems that have become indispensable in communication, entertainment, work, transportation, healthcare, and so much more.
The first iPhone in 2007 was powered by a 90 nanometre (nm) chip—a testament to cutting-edge technology at the time. Fast forward to today, the latest iPhone 14 Pro Max uses a 4 nm chip, packed with a staggering 16 billion transistors. Each nanometre represents the size of an individual transistor on a chip, showcasing the precision and miniaturisation achieved by the semiconductor industry.
Chips are the lifeline of countless devices we rely on with over a hundred billion semiconductors being used daily. Legacy chips with a size of 28 nm or larger aren’t considered cutting edge, but they continue to play a vital role in household appliances, cars, aircraft, and even military systems. Cutting edge chips (currently considered to be at or below 5 nm) can have up to a hundred layers consisting of billions of transistors that all need to be carefully aligned on top of a silicon wafer with nanometre precision.
Manufacturing chips takes can take up to four months or even longer from its design to being mass produced. There are three different types of chipmakers. Those that can design and manufacture chips (integrated device manufacturers), those that manufacture chips for others (foundries), and those that focus on chip design and outsource their production to other foundries (fabless chip companies).
In May 2021, IBM (a fabless chip maker) unveiled the world’s first 2 nm chip packed with 50 billion transistors.
This chip has the potential to revolutionize the battery life of our smartphone, allowing an iPhone 11 to survive four days before needing a recharge.
The cost of constructing a semiconductor fabrication facility (or ‘fab’), is estimated to range between $15 to 20 billion. As a result, the design and production of these specialised chips are concentrated with a few companies.
While the US boasts a stronghold in fabless chip companies, renowned for designing increasingly sophisticated chips, its contribution to chip manufacturing accounts for a mere 12% of global output. The majority of manufacturing takes place in East Asia, particularly in South Korea and Taiwan. The latter generates 92% of the world’s cutting-edge chips and is responsible for one-third of the planet’s new computing power each year. With chips having become so important, the industry has found itself of interest to national security.
Consequently, several countries have embarked on a quest for self-sufficiency or supply chain diversification. The poster child for this is the US which introduced the CHIPS Act in 2022, a strategic move aimed at channelling over $280 billion in spending over the next decade, with $52 billion earmarked specifically for chip manufacturing. This initiative has already yielded results with the announcement of over 50 new semiconductor projects, bolstered by private investments exceeding $210 billion. The EU is also providing incentives to the industry, with a €43 billion package to reduce its reliance on Asia and forge a more balanced supply chain. Despite strengths in science & technology, relative to the US & EU, companies are not being incentivised to come to the UK.
The rivalry between the US and China has resulted in the US imposing sanctions on China’s largest state-backed chipmaker, SMIC. China does have the ability to make legacy chips and with substantial growth also expected in this segment of the market, they could
undercut competitors, akin to its success in the 5G and solar panel market.
With the challenges faced by China, India is becoming a destination of interest for companies given its western based legal system, progressive government, and relatively cheap labour force. The Indian government also has ambitions to establish its own semiconductor
industry, offering $10 billion in subsidies to entice chip manufacturers.
Despite these short term challenges, semiconductor technology continues to rapidly advance, with the market set to reach annual sales of $1 trillion by 2030. Hence, semiconductors are one of the key growth themes to which EQ portfolios are aligned for the long-term.
COMPANY EXAMPLES
1) ASML
ASML is a Dutch company and Europe’s most valuable tech company. It is also one of the world’s leading manufacturers of chip making equipment – they don’t actually make the chips, but they design and manufacture the lithography machines that are essential
for chip manufacturing. ASML has a market revenue share of over 90% in the lithography manufacturing market. Lithography machines project light to imprint circuit patterns onto the silicon wafer until it is covered. This process is repeated 100 times or more, laying more
patterns on top. They sell the hardware to five fabs such as TSMC, Intel and Samsung – which made up nearly 84% of its business in 2021. They have also developed the sophisticated software behind the machines that play a vital role in optimising and enabling this precision.
ASML competes with the likes of Canon and Nikon (both Japanese companies) for their DUV (deep ultra-violet) lithography systems that is needed to make legacy chips. But ASML is the only company in the world that can produce EUV (extreme ultra-violet) lithography, the technology that is needed to make cutting edge chips. EUV technology uses a 13.5 nm wavelength of light (more than 14 times shorter than DUV) so fabs can fit more transistors onto the silicon wafer.
They have spent over 20 years developing their EUV technology with each machine costing around $200 million.
Each machine contains around 100,000 components and takes 40 freight containers, 3 cargo planes and 20 trucks to ship.
Fund in focus: Baillie Gifford Positive Change Fund & Scottish Mortgage Investment Trust
ASML is held in the Baillie Gifford Positive Change Fund. The fund invests in companies whose products and services are making a positive impact on society and the environment, while also providing investors with long-term growth opportunities. ASML is also held in the Scottish Mortgage Investment Trust that aims to identify, own, and support the world’s most exceptional growth companies, whether public or private.
2) TSMC
Founded in 1987, Taiwan Semiconductor Manufacturing Company Limited (TSMC) is the world’s largest foundry – they have a 60% market share – that has enabled fabless chip companies to flourish. They are also responsible for making 92% of chips that are designed by US fabless chip companies and in 2022, they served 532 customers and manufactured 12,698 products for a variety of end markets.
In May 2020, TSMC announced it would build a fab in Arizona and initially pledged $12 billion. The factory would be able to make 20,000 wafers a month with production to begin in 2024. In December 2022, they increased that to $40 billion so that it would upgrade
the factory to make more advanced chips and add another facility onto the site to produce 3 nm chips by 2026. This is the largest foreign investment into the US.
Once the plants opens it will produce enough advanced chips to meet the 600,000 wafers that are needed annually in the US. However, the project is challenging as US construction could cost at least four times as much than Taiwan due to rising inflation, labour expenses and regulatory compliance. TSMC are also looking to further their international footprint by exploring a possible plant in Dresden, Germany.
Fund in focus: Stewart Investors Global Emerging Markets Leaders Sustainability fund & Pacific Assets Trust
TSMC is an investment held in Stewart Investors Global Emerging Markets Leaders Sustainability fund and Pacific Assets Trust, which invests into medium and large-sized companies. The Stewart Investors Sustainable Funds Group looks for quality companies that have strong balance sheets and can contribute towards the sustainable development of the country in which they operate.
3) Nvidia
At the end of May-23, Nvidia reached the trillion dollars market milestone, and at the time of writing it has remained so. Five stocks in the S&P500 (Apple, Microsoft, Alphabet, Amazon and Nvidia) – all part of the trillion dollar valuation club – have accounted for 96% of the index gains in 2023. Nvidia became known for designing graphic processing units (GPUs) that are used for computer gaming, but these chips proved to be ideally suited to power artificial intelligence systems, a market the company now also dominates.
Like IBM, Nvidia is a fabless chip company that relies on foundries to produce their chips. One of its recent products, packs in 80 billion transitions.
Nvidia recently announced that it expected sales to reach $11 billion in the second quarter of 2023, confounding analyst estimates by more than 50%, causing its share price to nearly treble since the start of the year. Some of the largest Nvidia customers are Microsoft and Amazon, who use the chips to run their data centres, which are used to power AI applications.
ChatGPT was trained using 10,000 Nvidia chips and its release has been coined as an ‘iPhone moment’ for artificial intelligence – a race that has only just begun.
Fund in focus: Sanlam Global Artificial Intelligence Fund
The fund invests in companies that are engaged in activities associated with artificial intelligence, whether by way of research and development, in the provision of services, or in the transformational adoption of such services.
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