Semiconductors: The brain enabling technology shifts

  • The semiconductor industry has enjoyed significant growth in the digital age - a trend expected to continue
  • Semiconductors are increasingly used in industrial end-markets such as the factory automation and automotive sectors
  • We believe the increasing number of connected devices with heightened demand for new technologies like 5G and artificial intelligence will continue to drive growth in the semiconductor industry

Since the creation of the first silicon-based device in the 1940s, the semiconductor industry has been at the centre of the technological revolution.

Traditionally associated with computers, advancements in semiconductor design mean they are now crucial components of many aspects of our daily lives, changing the way we live and work, and responsible for broadening capabilities across almost any industry – from manufacturing to communications and automotive to healthcare.

Semiconductors can be thought of as the ‘brains’ enabling these technology shifts, and they have been proliferating over the last decade as the world has become more connected. Since around 2007, this has been most visible to many of us in the form of smartphones, but the last few years have seen the scope broaden and the potential opportunities impact many other parts of the economy.

A huge computer on a tiny chip

From computers that filled a room in the 1940s to desktop calculators in the 1960s and now the tiny unsung heroes of our smartphones, semiconductor devices called transistors have been made ever smaller, allowing them to be small enough to fit on a microchip, as shown in the image below:

Today, billions of transistors can fit on one tiny chip. This pace of change was predicted around 50 years ago by Intel Corporation co-founder, Gordon Moore. What came to be known as ‘Moore’s Law’ predicted that the number of transistors that you could fit on a chip would double every two years.

Only recently has that pace of miniaturisation slowed but innovation in semiconductor design has continued rapidly, particularly with greater software integration. From the mid-2000s, this was driven by the race between smartphone manufactures to release faster, smarter, more powerful devices year-on-year. As semiconductors became more capable, new market opportunities have opened up and the sector is now increasingly diversifying usage into new areas.

Examples of areas currently fuelling innovation

Below are some examples of the companies leading innovation in semiconductor deployment in the areas we expect to drive future growth:

  • The Industrial Internet of Things (IIoT): IIoT describes a system in which semiconductor chips are inserted into all kinds of machines and devices to enable them to collect, communicate, process and analyse data between them in manufacturing and industrial processes.  Silicon Labs manufactures devices for IIoT applications with their expertise, combining high performance and low energy consumption. There remains huge potential for further adoption of IoT applications, with Bain & Company anticipating a global spend of $520 billion by 2021.1
  • Autonomous & Electric Vehicles: Here, revenue is likely to be driven by consumer demand and the cost of semiconductor content per vehicle steadily rising as autonomous capabilities and the shift towards electrification both increase.  Currently, semiconductor content is estimated at $330 for conventional vehicles versus $1,000 in standard EVs.2 Texas Instruments, a brand that you may have come across when buying a calculator, is a leading global semiconductor design and manufacturing company. Its sensors and semiconductor components are increasingly needed for new innovations in the automotive sector, such as collision-warning systems and enabling autonomous & electric vehicles (EVs).
  • 5G/Smartphone Upgrade: Telecommunications firm Ericsson, predicts 5G will reach 65% of the world’s population by 2025 and handle 45% of global mobile data traffic.3 Qualcomm’s semiconductors, which are used in many Apple devices, are produced by Taiwan Semiconductor Manufacturing Company (TSMC), the leading foundry for semiconductor manufacturing.
  • Artificial Intelligence (AI): Nvidia is a semiconductor company focused on the development of graphics processors (GPUs) and related software. Its products enable access to advanced technologies and artificial intelligence in a variety of end markets such as industrials, video gaming and computationally intensive applications like datacenter and autonomous driving.

The digital future

Despite a relatively long history of dramatic growth, the most exciting time for investors to explore opportunities in the semiconductor industry could, in fact, be now. In our view, we are at the early stages of a period of sustained higher growth in certain markets as connected devices begin to see a wave of adoption in new areas like robotics, autonomous vehicles and connected factories.

The “techceleration” has just started – we believe 2020 will open a new decade of unprecedented steps in innovations with continued improvement in connectivity and semiconductors, both crucial components of the automation ecosystem.

We also anticipate a broadening of next-generation technologies like quantum computing, big data analysis, artificial intelligence (AI) and 5G communication networks that will unlock economic value and connect more digital consumers each day. By 2025, people will interact with an online device every 18 seconds (vs. 6.5 minutes today) with estimates for 500 billion connectable devices estimated by 2030 (vs. 30 billion today)4.

Implications for investors

In addition to rising adoption and greater diversity in semiconductor use, a number of other changes have occurred which lead us to feel this industry is in better shape today than a decade ago.

Firstly, as a broader trend of supply and demand has emerged, we feel that the semiconductors space is not as cyclical today as it once was, as firms increasingly look to focus on their inventory management and overall profitability.

Secondly, the industry has seen a shift towards outsourced manufacturing. Many semiconductor companies historically owned manufacturing facilities to produce these devices. However, as technology has advanced, so too have their business models. Presently, semiconductor companies outsource these capital-intensive processes to firms like TSMC, the global leading semiconductor foundry, to reduce costs and the risks associated with them. Instead, they can focus more on the research and development of new technologies.

Finally, the market has become more consolidated due to M&As, such as the acquisition of Cypress Semiconductor by Infineon, a German semiconductor manufacturer, in June 2019 for $10 billion to continue to expand its industrials, automotive and IoT offerings.5 This means that barriers to entry are ultimately higher in today’s market, favouring semiconductor designers and manufactures with a real competitive advantage who can provide enough capital expenditure for big volume production. A degree of further industry consolidation in recent years will undoubtedly help accelerate these trends - and set apart the winners from the losers.

The trends we have described, combined with a better industry structure, improved profitability and an optimistic growth outlook, provide strong reasons for investors to look closely at the semiconductor industry as an attractive long-term investment opportunity.

[1] Unlocking opportunities in the Internet of Things, Bain & Company, 7 August 2018
[2] Mobility trends: What’s ahead for automotive semiconductors, McKinsey & Company, April 2017
[3] Ericsson Mobility Report: 5G subscriptions to top 2.6 billion by end of 2025, Ericsson, 25 November 2019
[4] https://www.investopedia.com/the-10-trends-that-will-shape-the-global-economy-over-the-next-decade-4777822
[5] Infineon to acquire Cypress, strengthening and accelerating its path of profitable growth, Infineon, 2 June 2019