Part 1, The Core Value Chain – Who Adds Value?
It’s in the news: “Semiconductors are the new oil. The cliché is suddenly everywhere – and probably because crisps are suddenly scarce. We took oil for granted until the shortages of the 1970s made it “strategic”. This is now the case with semiconductors. People are talking. Defense experts are worried. Wall Street has perked up. Consumers are feeling it. You can’t buy this new Lexus because it doesn’t have a five dollar computer chip… The media are paying attention to the increased level of interest from viewers. Congress is drafting legislation to promote and subsidize chip manufacturing. The president speaks about it. The Wall Street Journal is alarmed by this new irruption of “industrial policy” across the world
- “Last month, the US Senate voted for direct subsidies to industry with little precedent: $ 52 billion for new semiconductor manufacturing plants. The European Union has pledged to almost double its share of global semiconductor manufacturing capacity to 20%. South Korea has approved up to $ 65 billion in semiconductor support, and Japan has pledged to match semiconductor aid from other countries… ”
There are geopolitical connotations – the flea race is said to be a critical dimension of technological competition with China.
The cliché of crisps like oil is true enough (as are most clichés); it doesn’t go very far. Which is understandable, because the “semiconductor industry” is extremely complex. It encompasses thousands of companies, pursuing many different technologies and business models. In the manufacturing segment alone
- “There are more than 30 types of semiconductor product categories… each of which may require up to 300 different raw material inputs… processed by more than 50 classes of high-tech precision equipment… incorporating hundreds of sub- technological systems… ”
In fact, the “semiconductor industry” is really a misnomer. There is too much diversity to lump them together and talk about, for example, the US market share in semiconductors. It’s more than just a basket of apples and oranges. To extend the metaphor, we could say that the industry includes companies as diverse as apples and elephants, and it probably doesn’t make sense to combine them – except that they are all involved in driving, and are being driven by, the digital economy.
A comprehensive mapping of this heterogeneous industry will occupy a number of columns over the next few months, which we will hopefully pursue in an organized fashion. Another aspect of the increased attention the industry is attracting today is the cluster of timely, high-quality and comprehensive investigations and reports, most of which are publicly available, to support the development of initiatives. These columns will distill and interpret the data provided in some of these reports.
The economic footprint of semiconductors
Start with some of the real big numbers. To “motivate” the analysis, as they say.
- Since 1995, some $ 4 trillion to $ 5,000 billion of global GDP has been directly linked to semiconductor design and production, with an additional $ 15 trillion reportedly “indirectly affected”
- Over the next ten years, the industry will invest “approximately $ 3 trillion in R&D and capital spending globally”
- The automotive industry should to lose $ 210 billion in car sales this year due to chip shortages (which approach 10% of total auto industry revenue)
- Intel, TSMC and Samsung – the 3 largest companies in the industry, technology leaders in the crucial manufacturing segment – have announced plans to invest around $ 300 billion in new manufacturing facilities over the next few years – this which is more than the market value of all North American automotive business
- Public funding for semiconductor development is difficult to account for and projections are changing, but it will approach half a trillion dollars over the next five years (40% of that coming from China)
- Total chip industry revenue now stands at over $ 600 billion annually – and was growing at an annual rate of 29% year-on-year in June 2021.
- According to the Federal Reserve, the semiconductor production sales volume index has increased by about 33 times since 2000 – and 900 times since 1992
These numbers are huge, but they only capture the direct financial footprint. The indirect impact of the semiconductor industry is of course much greater. The modern digital economy is powered by semiconductors. So, yes, it is our “oil”.
Industry segments (first cut)
The industry can only truly be understood if one dismantles the production process and the value chain. This will involve going through multiple layers and repeating this process multiple times, from multiple angles, e.g. by product type (processors, memory chips, analog chips, etc.), business model (design only, manufacturing, assembly / testing / packaging ), type of customer (smartphones, cars, etc.) and national affiliation.
The first step is to look at some of the high-level metrics for broad industry categories, based on the raw characteristics of the business model and position in the value chain. This process will expose a set of interesting facts about the industry that are not immediately apparent on a global level.
We’ll start with four basic segments:
- Design: The first step in creating an integrated circuit, as with almost all manufactured products, is to design it – in this case, to design a circuit that will perform a certain function, usually involving some calculation; this process is carried out largely “in software” (all the other functions are much more hardware)
- Manufacturing (Foundries): The manufacturing process converts the design into a physical product, a “chip” – which involves the manipulation and application of various raw materials (starting with ultra-pure silicon) to transfer the circuit design into its physical embodiment
- Assembly / Packaging / Testing: The manufacturing process usually results in a “wafer” that has been printed with several hundred individual integrated circuits, which must be sliced or diced, and then each integrated circuit is packaged appropriately. As this step is often overlooked in rough industry surveys (for reasons which will become apparent in subsequent installments), it is worth citing Wikipedia’s definition at length:
- “A semiconductor package is a metal, plastic, glass or ceramic package containing one or more semiconductor devices or discrete integrated circuits. Individual components are fabricated on semiconductor wafers (usually silicon) before being die-cut, tested, and packaged. The housing provides a means of connecting it to the external environment, such as a printed circuit board, via wires such as pads, balls or pins; and protection against threats such as mechanical shock, chemical contamination and exposure to light. Plus, it helps dissipate the heat produced by the device, with or without the help of a heat sink.
- Semiconductor manufacturing equipment: Also often overlooked as a purely ancillary segment, this category refers to capital goods used by other segments to perform and automate their functions. Again, due to recent developments, the critical importance of this segment is increasingly recognized. (For example, it was the embargo on the use of equipment in this category that really closed the door on Huawei’s access to US semiconductor technology.)
As we will see, companies in these categories have developed in very different directions. They have become synonymous with four typical and, today, generally distinct business models. While a few companies still perform more than one of these functions, most have specialized in a way that places them entirely in one of these categories.
One of the first deep dives we can do in the semiconductor ecosystem is to apply certain metrics to the “pure play” for each of these categories. (There are important subcategories within these core segments, so the exercise will be repeated at lower levels.)
Metric 1: added value
The first metric – in some ways overarching, the most definitive, and also one of the most defining results we’ll see when we apply many other metrics to track – is the percentage of the value of the end product that is added by each. . segment. In other words, if your smartphone’s microprocessor costs Apple $ 50, the question is: how much of that $ 50 can be attributed to, or was captured by, the company that provided the? Design of the chip? How much is attributable to the foundry that made the chip? How much does the company that “packaged” it? And how much to the company that built the amazing and complex equipment that allowed the designer, foundry and packer to perform their duties?
A study by the Boston Consulting Group and the Semiconductor Industry Association, published in April 2021, offers an answer, presented here:
So here is the first important stylized fact about semiconductors: The Design segment is dominant in terms of real value creation.
This basic fact will help explain many other facts that will emerge as we apply further measures to these categories. It will also help us understand the broader economic and geopolitical characteristics of this industry.