World Reimagined

Global Chip Race: Everything Investors Need to Know

Close-up of a semiconductor
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A we contend with the impact of wars in Ukraine and the Middle East, along with the aftermath of the pandemic supply chain disruptions, nations and investors are assessing industry vulnerabilities. The semiconductor industry is vital to civilian economies and militaries, and it has a highly vulnerable global pipeline. Much of the world’s GDP involves the production of devices that rely on semiconductors – an astounding reality for an invention that didn’t even exist seventy-five years ago.

This article discusses the current state of the global semiconductor industry, how it may be the single most important industry for national security and economic growth, and how geopolitics are reshaping it. 

Semiconductors Are Ubiquitous 

A wide range of civilian industries depend heavily on semiconductors (also called Integrated Circuits, IC or chips). Below is a list of top applications by chip revenue worldwide from 2022 to 2030 (in billions). Global chip revenue is expected to experience a total increase of over 77%, from $619 billion to $1.1 trillion (more than half the GDP of Italy in 2022, the 10th largest economy in the world).

  • Servers, Data Centers, and Storage: $100 to $249 (149% increase)
  • Automotive: $63 to $149 (137% increase)
  • Industrial Electronics: $73 to $160 (120% increase)
  • Consumer Electronics: $71 to $114 (61% increase)
  • Wired and Wireless Infrastructure: $53 to $82 (55% increase)
  • Smartphone usage: $144 to $213 (48% increase)
  • Personal Computing: $115 to $131 (14% increase)

National Security is Dependent on Semiconductors

The semiconductor industry is not only important for the economy but also the military. Those tiny devices are crucial to power a range of national defense technologies:

  • Semiconductors are essential in precision-guided munitions, drones, and missile defense systems.
  • Semiconductors are fundamental to secure, reliable communication technologies, crucial in coordinating complex operations, conducting surveillance and ensuring command and control across diverse and remote military environments.
  • Navigation and situational awareness technologies such as GPS, radar and various sensor systems require semiconductors. These tools provide troops and autonomous systems with real-time information on terrain, weather, and enemy movements.
  • Semiconductors are at the heart of systems designed to protect against cyber-attacks, electronic surveillance, and electronic warfare, helping safeguard sensitive information and counteract enemy systems.
  • Massive amounts of data are collected through military intelligence, surveillance, and reconnaissance (ISR) activities, which are then processed using systems that depend on semiconductors. This data is vital for operational planning and decision-making. 

The global supply chain disruptions during the pandemic made it clear to governments that all advanced technologies, from artificial intelligence to automobiles, from drones to missile guidance systems, depend entirely on semiconductors, and an astoundingly small number of companies control their design and production.

Highly Concentrated Industry 

The semiconductor industry is highly concentrated, with most companies enjoying revenue growth rates in the double digits. The market caps of the top 12 semiconductor companies worldwide (as of late October 2023 in billions of U.S. dollars), and their five-year revenue growth rates (annualized) are shown below. The largest player’s market cap is more than double that of the second largest, about 4.5 times that of the fifth largest, and nearly 10 times the tenth largest. The market cap of the top two is almost the size of the next eight combined.

  • Nvidia (NVDA) $1,061/22.7%.
  • Taiwan Semiconductor Manufacturing Co (TSM) $472.5/18.9%.
  • Broadcom (AVGO) $355.9/13.5%
  • Samsung (SSNLF) $338.8/2.1%
  • ASML Holdings (ASML) $236.6/17.1%
  • Advanced Micro Devices Inc (AMD) $161.6/35.1%
  • Intel (INTC) $141.8/0.1%
  • Texas Instruments (TXN) $132.9/6.01%
  • Qualcomm (QCOM) $121.3/14.7%
  • Applied Materials (AMAT) $112.3/11.9%
  • Analog Devices (ADI) $81.7/18.0%
  • Lam Research (LRCX) $79.5/9.5% 

Looking at the semiconductor market share by revenue in 2022, we see different rankings, with the top two by market cap, Nvidia and TSMC, not even making it into the top 10:

  • Samsung Electronics 9%
  • Intel 7%
  • SK Hynix (KXSCL) 0%
  • Qualcomm 8%
  • Micron Technology (MU) 6%
  • Broadcom 0%
  • AMD 0%
  • Texas Instruments 1%
  • MediaTek (MDTKF) 0%
  • Apple (AAPL) 9% 

Why so different? Because when we talk about semiconductor companies, we are talking about a range of activities. The semiconductor supply chain can be broken down into roughly three phases:

  • Design
  • Fabrication
  • Assembly

Integrated device manufacturers (IDMs), such as Intel and Samsung, perform all three steps. Firms that only design chips are known as fabless or integrated circuit (IC) design companies and rely on chip manufacturers, called foundries, for fabrication. For context on the relative size of fabless, in 2020, the global sales of fabless companies were $128 billion or 32.8% of total IC sales worldwide, up from just 13% in 2002. The share of fabless is expected to rise to the mid-thirties by 2025. 

Taiwan Semiconductor Manufacturing Co (TSMC) has a market cap that is less than half of Nvidia’s, but since Q3 2019, it has generated over half of global foundry revenue. In Q1 2023, it generated a whopping 60.2% of global foundry revenue. This is a list of the top semiconductor foundries by share of worldwide revenue in Q2 2023 and their 3-year annualized revenue growth rate as of the end of 2022:

  • TSMC 4% (30.1%)
  • Samsung 7% (5.9%)
  • GlobalFoundries (GFS) 7% (11.7%)
  • United Microelectronics Corp (UMC) 6% (23.1%)
  • Semiconductor Manufacturing Intl (China state-owned) 6% (NA)
  • Hua Hong Semiconductor (HHUSF) 0% (38.5%0
  • Tower Semiconductor (TSEM) 3% (10.8%)

If TSMC produces more than half of the world’s chips, why is its market cap less than half of Nvidia’s? Nvidia is a fabless IC company, and that part of the IC supply chain has experienced the strongest growth rates. Between 2011 and 2021, global fabless revenue grew at a compound annual growth rate of around 10%, double that of the IDMs. Nvidia is expected to experience even more dramatic growth rates because its chips are widely used in artificial intelligence. Below is a list of the top IC design companies by worldwide revenue in Q2 2023 (in millions) and their 3-year annualized growth rate as of the end of 2022:

  • Nvidia $11,332 (35.2%)
  • Qualcomm $7,174 (22.1%)
  • Broadcom $6,897 (13.7%)
  • AMD $5,359 (51.9%)
  • MediaTek $3,195 (32.4%)
  • Marvell (MRVL) $1,335 (29.9%) 

Complex Supply Chains

One of the most significant impacts of war, be it a military or trade war, is the disruption of supply chains. Semiconductor manufacturing is a global enterprise, with materials and components moving across many international borders. While today’s semiconductor supply chains include components from many regions around the world, almost every chip made today still has a connection to Silicon Valley or is produced with tools designed and built in California.

The U.S. semiconductor industry accounts for about half of the global market. While the U.S. excels in design and development, its manufacturing dominance has declined, prompting discussions about increasing domestic production and reducing reliance on Asian foundries, especially considering geopolitical tensions and supply chain vulnerabilities. In 2022, the semiconductor industry in the U.S. accounted for 48% of total global production based on the company’s headquarters. South Korea came in second with 19% of the market. Companies in Japan and the European Union were tied for third at 9% each.

The dependency on semiconductors underscores the importance of a secure supply chain. Concerns over international manufacturing and supply, especially given the bulk of global production centered in Asia, have led to many regions wanting to boost domestic production capacities. For China, the situation is complex.

In 2022, China imported 538.4 billion IC units at an estimated value of $415.6 billion, according to the General Administration of Customs. In comparison, crude imports in 2022 were much less at an estimated $365.5 billion. In 2021, the difference was even more profound, with China importing 620.8 billion IC units and an estimated $431.8 billion versus crude imports of $257.3 billion. On the other hand, in 2022, China was the world’s largest silicon producer at an estimated 6 million metric tons (68% of the global total of 8.8 million metric tons). The second largest was Russia, at just 640,000 metric tons.

Global Chip Race

The prior international technology battle dubbed the Space Race has been replaced with the chip race as nations scramble to shore up their access to semiconductors, boost domestic industry and limit competitors’ access to critical supplies and technologies. We’ve seen a slew of legislative acts over the past year that will funnel funds from taxpayers into semiconductor projects:

  • In August 2022, the U.S. passed the CHIPS and Science Act, which provides around $280 billion in new funding for domestic research and manufacturing of semiconductors, $39 billion in grants for manufacturing, and 25% tax credits for construction. It also includes a provision prohibiting CHIPS funds recipients from expanding material semiconductor manufacturing capacity in foreign countries of concern for ten years and restricting recipients from certain joint research or technology licensing efforts with foreign entities of concern.
  • In May 2023, the UK government announced plans to offer chip companies up to £1 billion ($1.21 billion).
  • In July 2023, the European Union passed its Chips Act, which aims to double the EU’s global market share from 10% to at least 20% by 2030 through investments estimated at €43 billion ($45.3 billion). 

The U.S. and China have engaged in a back-and-forth banning battle for years. Here are just a few of the more recent moves in the semiconductor industry:

  • On the same day in May 2023 that President Biden predicted the relationship between the U.S. and China would “thaw very shortly,” China announced a ban on products from American chip maker Micron Technology.
  • In July, China announced planned restrictions on exports of gallium and germanium, two metals considered vital to the semiconductor sector, along with more than three dozen related metals and other materials.
  • In August, President Biden signed an executive order to regulate U.S. investments in China in semiconductors, microelectronics, quantum information technologies, and artificial intelligence. Final rules were issued in September.
  • In September, the Wall Street Journal reported that China had ordered central government officials at some regulators not to use Apple’s (AAPL) iPhone or other foreign-branded devices for work. Bloomberg later reported that the government has plans to expand the ban to more agencies and state-sponsored companies.
  • Earlier this month, shares of Nvidia dropped on the news that the U.S. was updating restrictions that would curb the sale of chips the company makes for the Chinese market. 

Companies are also looking at their supply chains and production pipelines and adjusting them to reduce the impact of trade wars. Here are just a few examples:

  • TSMC is investing $40 billion into a new “fab” outside Phoenix, Arizona, to produce 600,000 wafers annually. The location is intended to be a first trial, with more expected to be built in the future outside of Taiwan. The company is also building plants in Germany, Japan, and mainland China, aiming for $92 billion in capital expenditures through 2025.
  • Samsung plans to have a 4 nanometer-class foundry in production in Texas by the end of 2024.
  • Intel Foundry Services and Tower Semiconductor announced an agreement last month wherein Intel will provide foundry services to help Tower service its customers globally, utilizing Intel’s facilities in New Mexico. Tower will invest up to $300 million to acquire and own equipment to be installed in that facility.

The Bottom Line 

At the birth of this industry, just sixty years ago, there were just four transistors on a cutting-edge chip. Today, that number is nearly 12 billion. The chip industry now produces in one year more transistors than the combined quantity of all goods produced by all other companies in all other industries in all of human history. In the coming decades, no other industry will have a greater impact on both our everyday lives and the geopolitical landscape.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Lenore Elle Hawkins

Lenore Elle Hawkins has, for over a decade, served as a founding partner of Calit Advisors, a boutique advisory firm specializing in mergers and acquisitions, private capital raise, and corporate finance with offices in Italy, Ireland, and California. She has previously served as the Chief Macro Strategist for Tematica Research, which primarily develops indices for Exchange Traded Products, co-authored the book Cocktail Investing, and is a regular guest on a variety of national and international investing-oriented television programs. She holds a degree in Mathematics and Economics from Claremont McKenna College, an MBA in Finance from the Anderson School at UCLA and is a member of the Mont Pelerin Society.

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