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It is hard to imagine a world without computers, smartphones and the countless electronic devices that make human life more productive and enjoyable. The invention of the transistor in 1947 followed by the first integrated circuit a decade later have been two of the most important innovations in modern history. 60 years later, there are very few facets of life that can function without the use of semiconductors. The benefits however have also brought on new challenges.
Over the last couple of years, particularly since the COVID-19 Pandemic, semiconductors began to creep into the headlines, and not for their amazing benefits. In 2020, global supply chain disruptions emerged following the onset of the Pandemic, which led to shortages of critical semiconductors, given production disruptions and border shutdowns. The Pandemic's impact across the electronics value chain, from materials to final products has highlighted the potential risks and vulnerability of today's electronics and semiconductor value chain and has created many supply challenges for the semiconductor industry.
The intricate world of semiconductors
In an effort to shed some light on today's challenges and the complex dynamics at play around semiconductors, TD Asset Management Inc. (TDAM) recently authored a paper titled The intricate world of semiconductors. The article helps shed some light on the industry and describes the "who, what, when, where, how and why" of the semiconductor world. The article also discusses investment implications and opportunities including TDAM's outlook on the sector.
The what and when
Semiconductor devices are electronic components that enable the transfer of information and decision-making for electronic devices. Following the invention of the first integrated circuit in 1958, the number of transistors - which are building blocks for semiconductors - that can be placed into a microchip has doubled approximately every two years, following an axiom known as Moore's Law. As a result, the performance, cost, and power consumption of electronic devices have all improved exponentially and have expanded the number of use cases from scientific research to military applications and now most facets of human life.
The who
Though most of the semiconductor demand is led by consumer products, TDAM anticipates incremental demand will be predominantly driven by a wider set of end-markets such as industrials, health care and in particular the automotive industry. Environmental issues and decarbonization efforts are resulting in higher semiconductor intensity to tackle climate change and electric vehicles have over two times more semiconductor content1 than their internal combustion engine counterparts. Additionally, solar panels, wind turbines and energy efficiency sensors are all drivers of incremental semiconductor demand.
The where
The U.S is the leader in global semiconductors, accounting for over 45% of industry revenues, but from a manufacturing standpoint, U.S. capacity has fallen to 12% from 37% since 1990. Today, 75% of semiconductor manufacturing is done in Asia and nearly all the most advanced semiconductors are made in either Taiwan or South Korea2.
Asia’s leadership in manufacturing has been partly driven by government subsidies, given the high capital outlay to design and manufacture semiconductors. Since 2011 China has provided the industry with over $100 billion in subsidies towards manufacturing, assembly, and testing, reaching a near 40% share of semiconductor assembly, packaging and testing and over 15% market share in wafer fabrication - and China is not alone in its active investment in the industry within Asia3.
The how
It took 50 years for semiconductor sales to reach US$500 billion and over the next eight years, the industry is expected to double to $1 trillion in sales4, driven by the continued proliferation of electronics and the emergence of new technologies. Against this backstop, we see evidence that the historical outperformance of the industry will persist over time as semiconductors are the enablers of a technology-led future. We believe the rapid change in technology leadership requires active portfolio management to capture the industry outperformance.
The why
The reasons to invest in semiconductors have rarely been stronger. As the global economy continues to prosper in an increasingly digital and sustainable manner, semiconductors will remain indispensable. Although the recent bout of underperformance in technology has been puzzling, long-term investors should consider having a close look at this sector.
Combining powerful secular drivers for semiconductor companies while keeping in mind increasing politization of the industry and rapid changes in technology leadership, the case for an active portfolio management approach becomes glaringly apparent.
1McKinsey & Company, Mobility trends: What’s ahead for automotive semiconductors. April 2017.
2Boston Consulting Group, Semiconductor Industry Association, Strengthening the Global Supply Chain in an Uncertain Era, April 2021.
3Source: Global Foundries, Delivering Pervasive Semiconductors for Humankind, October 2021, Boston Consulting Group, Semiconductor Industry Association, Strengthening the Global Supply Chain in an Uncertain Era, April 2021, McKinsey and Company, Semiconductor design and manufacturing: Achieving leading-edge capabilities, August 2020, Roadmap to 2050: Canada’s Semiconductor Action Plan, Industry Report & Recommendations November 2021, Canada’s Semiconductor Council
4McKinsey and Company, The semiconductor decade: A trillion-dollar industry, April 2022.
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