Semiconductors: "To see a World in a Grain of Sand"

You can listen to this Primer here

Semiconductors are almost invisible but indispensable material in our modern life. Semiconductors are hardly tangibly felt by most of us even though anyone reading this piece may be “using” semiconductors almost on an hourly basis. Like William Blake’s one of the poems starts with “To see a World in a Grain of Sand”, the very tenets of modern world is indeed intertwined with silicon, a component of sand, which is a semiconductor material extensively used in the manufacturing of chips.

That mood of indispensability was well captured by NZS Capital in their White Paper on Semiconductors:

“A good exercise in assessing a potential investment is to ask “could the world get by without this company?”. The answer is usually, “in time, probably just fine.” But should we wake up tomorrow to find that any among Taiwan Semiconductor Manufacturing Co. (TSMC), ASML Holding, Lam Research, Cadence, Synopsys and KLA-Tencor have suddenly ceased to exist, the answer at best is “well, yes, but global progress will suffer a setback of several decades at least.” The loss of a handful of critical chipmakers that depend on these companies – such as NVIDIA, Samsung, Intel, AMD, Texas Instruments, Xilinx, Broadcom and Microchip Technology – would dramatically impede the digital transition of the economy still further.

Why? Because these companies are at the core of a half a trillion-dollar industry that enables us to do pretty much everything, from flying across oceans to booking a ride and ordering a pizza when we get there; from diagnosing and treating a disease to boosting agricultural yields; from supporting the military to powering our cities.”

-NZS Capital

The ubiquity of semiconductors or chips is likely a bit shocking to anyone who doesn’t follow semiconductors. Chris Miller put things in perspective about the pervasiveness of semiconductors in his seminal book “Chip War” published in late 2022: “Last year, the chip industry produced more transistors than the combined quantity of all goods produced by all other companies, in all other industries, in all human history.”

Where do we use all these semiconductors? Communication, and computer industry drive more than half of the overall global demand for semiconductors today. Even though automotive, consumer, or industrial sector each constituted ~14% of overall semiconductor demand in 2022, they were all significantly higher growth areas for semiconductor industry.

Figure: Semiconductor Demand Drivers; Source: Semiconductor Industry Association (2023)

Nearly half of global semiconductor sales comes from the US semiconductor companies, but sales outside the US comprise ~80% of sales of the U.S. semiconductor industry.

Source: Semiconductor Industry Association (2023)

While semiconductors can be cyclical industry, the industry’s sales grew from $139 Bn in 2001 to $574 Bn in 2022, implying a ~7% CAGR over this period.

Source: Semiconductor Industry Association (2023)

These numbers look all big and impressive and it should already be clear by now that this is an enormously important industry, but I would like to take a step back and start from the very basics. This is quite a technical industry and full breadth of basics and technical concepts will require perhaps an entire book. If you are very curious, I do have a separate book suggestion to gain a better understanding on the technical concepts: “Understanding Semiconductors: A Technical Guide for Non-Technical People”. As a generalist myself, I did read this book and thought it was reasonably helpful. So, I will start with some of the basics in Section 1 so that most readers don’t feel truly lost as we dig further into this Primer.

In Section 2, I will discuss some historical contexts in semiconductor industry.

In Section 3, I will elaborate on the semiconductor value chain.

In Section 4, I will assess the geopolitical contexts in the semiconductor industry.

In Section 5, I will conclude the primer with my three broad takeaways after studying the industry for the last month.

This post is for paying subscribers only

Already have an account? Sign in.

Subscribe to MBI Deep Dives

Don’t miss out on the latest issues. Sign up now to get access to the library of members-only issues.