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22 May 2024 16h15

Semiconductors: an investment guide

Semiconductors: an investment guide



Like the oil market, the semiconductor market is a game of geopolitics. Find out what you need to bear in mind when investing.


Demand for semiconductors has grown significantly in recent years. In 2023, the global semiconductor market was valued at $545 billion and is expected to reach around $1140 billion within 10 years, by 2033. 




[Source: Precedence Research]


Increased optimism is driven by the needs and performance requirements of new technologies, such as artificial intelligence. As a result, a number of particularly attractive investment opportunities are emerging, albeit not without risk. Find out where the semiconductor market stands now, what is attracting investors' attention, and what you should consider when making an investment. 



What are semiconductors?


When we talk about semiconductors, we're talking about nanometre-scale integrated circuits (ICs), or chips. These highly specialised components provide functions for the processing, storage and transmission of data. In turn, semiconductors consist of transistors placed on a thin layer of semiconductor material (wafers), usually made of silicon. According to the Semiconductor Industry Association (SIA), semiconductors are the fourth most traded product in the world. 


The semiconductor industry's global production chain is highly specialised, with players from different regions of the world. It requires a symbiotic relationship between the countries involved, with free trade in materials, equipment, intellectual property and intermediate products. One of the biggest long-term risks to the industry is the continuity of these chains in certain regions of the world.  The SIA estimates that instability along the value chain could lead to a 35-65% increase in the price of semiconductors, affecting the cost of all electronic devices. 


From a general economic perspective, industries can be classified as R&D (Research and Development) or CapEx (CAPital EXpenditure). The data shown in the chart below for 2019 shows that the semiconductor industry is a leader in both classifications: the design segment accounts for more than half of the industry's R&D, while the manufacturing segment accounts for more than three-quarters of the industry's CapEx.  



The sector is highly competitive and innovation is constant. Trends point to a focus on specialised semiconductors, such as those for artificial intelligence, autonomous vehicles and the Internet of Things (IoT), creating strategic investment opportunities.



Types of semiconductors


Although there are more technical classifications, chips can be divided into 3 main categories:


• Processing: this type of chip works on the basis of binary codes (0 and 1), which is the fundamental basis of calculation and computation: microprocessors (CPUs and GPUs), field programmable gate arrays (FPGAs), microcontrollers (MCUs) and connectivity products (mobile modems, WiFi, Bluetooth and Ethernet). 


• Memory: the data storage chips needed to perform any computation. The 2 main types are: 


     • DRAM: storage of the data or programme code needed for a processor to work;


      • NAND: this is flash memory (SSDs, HDDs). Unlike DRAM, it can store data permanently. 


• DAOs (Discrete, Analog, and Others): these chips transmit, receive and transform data from continuous variables (such as temperature and voltage): 


      • Discrete chips: designed to perform electrical functions;


      • Analogue chips: convert analog signals, such as speech, into digital signals;


      • Others: optical sensors and a wide range of device sensors. 



Who are the key players in the market?


The semiconductor industry has changed a lot in its six-decade history. In the 1960s, a select group of companies dominated all stages of the value chain, with virtually complete vertical integration. However, as complexity increased, so did the need to scale business models in order to maintain the pace of innovation, thus increasing the degree of specialisation of market players.


IDM companies (Integrated Device Manufacturer)


IDM (or Integrated Device Manufacturer) companies were the pioneers of the industry, integrating the various segments of the value chain: design, manufacturing, assembly, packaging and testing. In the early decades of the industry, the IDM model was dominant, but increasing investment in R&D and CapExp created the need for specialisation. 


Fabless companies


Fabless companies focus on chip design, including NVIDIA, and outsource manufacturing, assembly, packaging and testing. This type of company was created in response to the demands of the pace of innovation in the industry, which made it increasingly difficult to keep up with the R&D and CapEx costs of the most innovative projects, given the technical complexity and initial investment. It is estimated that the cost of building a chip fab is around €20 billion, with a production time of around 5 years. 




This type of company specialises in the production of semiconductors, in response to the production needs of fabless companies and some IDMs. This business model requires a high level of capital investment to cover high initial costs, creating a high barrier to entry for new players. 


Today, foundries account for 35% of the industry's production capacity and 50% if we exclude the memory chip segment (which is furthest from the industry's cutting-edge technology). Their share rises to 78% for the production of <14nm process chips and they are the only companies currently producing chips at or below 5 nanometres, the most advanced on the market.


Outsourced Assembly & Testing (OSATs) companies


OSATs provide services directly to IDMs and fabless companies. This segment of the value chain was one of the first specialisations to be outsourced by US IDMs in the 1960s, as it was less capital and labour intensive.





How supply is organised geographically


Understanding the geographical distribution of supply is essential to assess potential geopolitical risks and identify synergies. This chart shows the representative share of each geography by supply chain segment.  




The market is fragmented along the value chain into regionally dominated segments, with no country having full production capacity:


• The US leads in R&D-intensive activities because of the amount of know-how it is able to generate in an ecosystem favourable to technological innovation. The US has an advantage in the software tools that allow chips to be "designed" and in the design itself, due to its investment in R&D and the fact that it is a very attractive source of talent. 


• East Asia is a leader in the production of wafers (the silicon substrates on which chips are "printed"). This activity requires high levels of capital investment, government support and skilled labour. Taiwan is the production centre for the world's most advanced processing chips, thanks to TSMC. 


• China is a leader in assembly, testing and packaging, activities that have lower barriers to entry because they do not require a skilled labour force. However, there has been a huge investment in terms of resources in order to increase its share of the value chain.


• South Korea has the comparative advantage along the value chain in memory chips. 


• When it comes to equipment, more specifically lithography machines, we look at Europe as a whole and not directly at the Netherlands, due to the fact that ASML's suppliers are mostly European, which means they have unique access to certain types of technology.



How to invest in semiconductors


You can start investing in the semiconductor sector through a basket of different stocks to diversify, through technology-focused investment funds or through an exchange-traded fund (ETF). 


In terms of selecting companies, you can invest in those that provide direct or indirect exposure, as well as those that supply raw materials or design or technology services to the semiconductor sector. 


There is a lot of enthusiasm around semiconductors and a strong demand outlook, but there are also some risks that investors should be aware of. These include geopolitical issues and the potential for production costs to rise. Trade tensions between major economic powers such as the United States, China and the European Union can create uncertainty and volatility in semiconductor markets. Trade restrictions, tariffs and sanctions can affect chip trade and collaboration between companies in different countries, causing disruptions to operations and impacting companies' financial results.


For example, tensions between the US and China have been felt since the years of the Trump administration. The current geopolitical context has led to a more defensive stance on the part of the US, which has taken steps to reformulate sectors with national security interests, including the semiconductor sector. In this respect, supply chains are very sensitive to the increasingly strained international relations. 



Banco Carregosa, specialist advice for investment in semiconductors


Semiconductors (chips) may be a good investment for you, but before you invest you need to understand how the industry works, who the key players are and how developments may affect different segments of the global economy. At Banco Carregosa, you can rely on the support of expert advisors to strategically integrate semiconductors into your portfolio, taking into account your risk profile, time horizon and specific objectives. Contact us.