Modern life is unimaginable without computers. Early computers were built with vacuum tubes, which occupied an entire building and generated lots of heat while consuming enormous power. The advent of semiconductors, with the early transistors, ushered in a new era in computing. The invention was so path-breaking that the Nobel prize in physics in 1956 was awarded to the trio of Shockley, Bardeen, and Brattain for their contribution to semiconductor research, rightly so.
What is a semiconductor? Semiconductors are substances with electrical properties between a conductor and an insulator, making them apt for conditional programming. An integrated circuit, which forms the basis of computing, is a packaged set of multiple functions in a single unit. The VLSI – very large-scale integrated circuits, prevalent in the 80s, contained up to 10 million components per chip. The modern ICs comprise a more significant multiple of components than the VLSI and have various functions integrated into the same chip. To give a perspective on sizes, the smallest dimension of IC elements on a modern chip are in the order of 10 nanometers (10 to the power minus 9 meters).
Types of Semiconductors:
There are many kinds of semiconductors and semiconductor devices – based on both the properties and end-use. The categories based on properties are too technical, and it is more meaningful to look at the semiconductor devices based on functionality. These are: computing, memory, power devices, and microelectromechanical systems (MEMs).
Computing devices include most CPUs and other processors such as graphics processors. Memory devices are the RAMs, DRAMs, Flash memories, and other storage devices. Power devices are used to control the power supply; these include rectifiers and IC transformers. MEMs are micromechanical components such as sensors and actuators.
Together, they become the building blocks of most modern gadgets, from ATMs to computers, smartphones, all the way to performing special functions for automobiles, household appliances, and medical devices. Communication networks, computer manufacturers, and smartphone makers are by far the largest consumers of semiconductors devices, followed by industrial and automobiles.
Source: IEEE
The companies within the semiconductor industry are also of several kinds. These include semiconductor equipment makers, circuit and architecture designers, foundries, and component makers. Some companies are involved in multiple functions.
Semiconductor Equipment:
Semiconductor equipment makers are companies that manufacture the machines that are in turn used to fabricate semiconductors. These are capital-intensive businesses and take years of research to come up with newer designs. Fabrication of chips involves sophisticated machines that provide a highly controlled environment for the lithographic process. Understandably, there a just a handful of companies in the world that operate in this space.
ASML, based out of the Netherlands, is one of the largest semiconductor equipment makers. The latest equipment from this company is capable of extreme ultraviolet lithography and provide capacity for up to 5 nanometer nodes.
Applied Materials is a US company that provides semiconductor manufacturing equipment and associated software solutions. The firm had $17.20 billion in 2020 revenues.
Source: Morningstar
Major Fabricators:
Foundries are semiconductor manufacturers that fabricate the chips. These include the manufacture of ICs for processors, memory chips and other microchips. Some of the world’s leading companies in this space are:
By far the largest manufacturer of semiconductor devices, TSMC is based in Taiwan. Some of its major customers include Apple and Huawei.
UMC is a company Taiwan and a company involved in the fabrication of semiconductor chips. It is a major supplier to automobile companies.
Intel is the iconic US manufacturer behind many of the major CPUs. Intel designs its chips and fabricates the chips. Recently, the company has unveiled a plan to come up with a major upgrade to its CPU device every year for the next five years.
Source: Morningstar
Fabless Semiconductor Businesses:
There is another class of Semiconductor companies that design the various circuits and architecture, but don’t have foundries of their own and rely on the likes of TSMC and Samsung for their manufacturing. These are known as fabless semiconductor companies. Some of the major firms in this area include:
Qualcomm designs semiconductors for the wireless industry. It creates software and services as well. This company had $19.5 Billion in 2020 revenues.
Broadcom designs semiconductor for the wireless and broadband communication industry. Acquired by Avago technologies, the firm operates as a wholly owned subsidiary if the merged entity. Broadcom had revenues of $17.7 billion in 2020 revenues.
Probably the largest designer of graphical processing units (GPU), Nvidia is a vital player in the video gaming market. It makes both GPUs and System on a chip unit (SoC) unit- where all the components of a system are integrated on a single unit.
Source: Morningstar
Semiconductor Components and Devices:
Semiconductor companies that manufacture multiple components play a vital role in the overall landscape. Many of these companies manufacture a variety of components. Few names in this area include:
NXP is focused on the automotive industry and makes semiconductor components such as microcontrollers, smart power drivers, and power management devices.
Micron specializes in the data storage and memory areas and makes RAMs, Flash drives and other storage devices.
One of the oldest operators in the area, Texas instruments makes a suite of semiconductor products with wide applications. It continues to make calculators and holds over 45000 patents.
Source: Morningstar
Effect of the Pandemic:
The Covid pandemic has had a significant impact on the semiconductor industry. With most of the manufacturing facilities based in the US, Taiwan, and other Asian regions, the disruptions caused by lockdowns, closures, and delays have caused a profound impact in multiple industries that depend on the various devices and components. Natural disasters added to the woes. Particularly, automobile manufacturers were affected quite a bit. Modern automobiles use increasingly large amounts of semiconductor devices, both on onboard circuitry and in their infotainment systems. Electric vehicles are even more dependent on the availability of chips and use them intensively for the various sensors and onboard computers. Many manufacturers, including GM, Toyota, Tesla, and VW, have halted production due to the shortage of chips.
Source: U.S. International Trade Commission
The shortage has already laid the foundation for more localized semiconductor manufacturing, with some automakers even planning fabs to be run by themselves.
Artificial intelligence, automation, self-driving, Internet of things (IoT) are all trends that indicate that the demand for semiconductor devices will only accelerate in the future. IoT, where devices across a spectrum are connected and inter-operate, is key to smart homes, smart cities, and intelligent working environments. These not just require higher processing power but also compatible devices. All of this is likely to fuel growth in the industry for several years. Some companies that operate in the IoT space include Qorvo, and Skyworks Solutions, and Cypress Semiconductors.
Investing Opportunities:
The semiconductor industry is vital to the future of technology and is an exciting theme for investors. One can invest by directly buying the stocks. However, large companies like Samsung and many mid-sized players in Taiwan are not available as ADRs and trade only locally. ETFs provide a more efficient way to gain exposure to the theme. Some of the top ETFs in the space include iShares Semiconductor ETF (SOXX), VanEck Semiconductor ETF (SMH), SPDR Semiconductor ETF (XSD), and Invesco Dynamic semiconductor ETF (PSI).
Source: Morningstar
The Next-Gen Globe, a curated portfolio offered by Globalise includes the semiconductor industry as a key component.
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