Q4 2021: semiconductors in the limelight

The technological leaps we’ve seen during COVID-19 have boosted demand for them, including the rollout and expansion of 5G, the mounting need for data and bandwidth, the Internet of Things, and cloud computing. “Add to that Industry 4.0, which is the connected smart factory next level of integration, and you can really understand what’s driving demand,” a former SVP at GlobalFoundries said in a Forum Interview. 

Global semiconductor growth is expected to soar from 7% in 2020 to 26% in 2021, the biggest step-up since a 32% increase in 2010, according to World Semiconductor Trade Statistics.¹https://www.wsts.org/76/Recent-News-Release However, it’s no secret that the industry has been struggling to maintain consistent supply due to COVID-19’s impact on supply chains. That’s why the foundry market is growing at a faster rate than the overall industry. 

Competition is intensifying and government funding is playing a pivotal role in the industry’s development plus the expansion plans of many players. Representing a global manufacturing share of 12% today compared with 37% in 1990, the US is working hard to rebuild capacity. The Chips for America Act, worth over USD 50bn but not yet enacted, aims to position the US at the centre of industry growth as other countries, particularly China, also invest ambitiously in incentives. As our expert noted, even though China has struggled to develop leading-edge manufacturing capabilities, where it goes next is “a little bit of a wildcard that could disrupt the overall world market”. Congress is also considering rolling out the Fabs Act to establish a semiconductor investment tax credit.² https://www.semiconductors.org/chips/ 

Taiwan’s TSMC and Samsung Electronics represent a combined 70% of the foundry market – at 53% and 17% respectively³https://www.statista.com/statistics/867223/worldwide-semiconductor-foundries-by-market-share – and are closely linked to this shift. The latter’s announcement of a USD 17bn cutting-edge factory in Texas is a prime example of companies being directly incentivised to increase their operations in the US and diversify their supply chains.⁴ https://www.ft.com/content/1bdb3163-59ab-4cb4-b3b5-8970a7290b85 Samsung aims to open the facility in H2 2024 as a hub for its global manufacturing capacity, along with its latest production line in South Korea. In June 2021, TSMC started building a USD 12bn chip factory in Arizona and in April 2021 announced a USD 100bn plan to boost capacity at its factories over the next three years.⁵https://www.reuters.com/technology/tsmc-says-construction-has-started-arizona-chip-factory-2021-06-01/

Turning to competitive dynamics, Samsung and TSMC are investing heavily in next-generation nodes, with the former approximately 1-2 years behind the latter, according to our specialist. With Samsung lagging in yield and performance, the company has historically lowered its prices to attract customers. However, it is now attempting to power ahead with plans to release 3nm nodes by 2023 and pivoting to GAA (gate-all-around) architecture. Overall, our experts see this as an aggressive move. As noted by a former senior engineer at Samsung Electronics, even TSMC has yet to conquer GAA and we heard that switching to GAA could exacerbate Samsung’s problems in multi-VT tuning. Experts agree that given Samsung’s deep R&D pockets the company will eventually catch up with TSMC, though a failed GAA attempt would be a major setback. Conversely, a 3nm win could reposition Samsung, potentially enabling it to lure back foundry customers, including Apple. 

One specialist raised concerns about GlobalFoundries, which, having withdrawn from leading-edge manufacturing, now competes more closely with the likes of SMIC and TowerJazz (with 6%, 5% and 1.5% market share respectively⁶https://www.statista.com/statistics/867223/worldwide-semiconductor-foundries-by-market-share/ ). A former VP at the company noted that GlobalFoundries has previously struggled with “spotty performance” in providing wafers on time and of adequate quality, as well as financial viability. Additionally, we heard that “last year utilisation was below 69%, which is probably the lowest of all foundries”. Proceeds from its IPO will be key for its growth and operations, with US and European subsidies – which we’re told the company is well positioned for on a federal level – fundamental to its future success.

Meanwhile, Intel is doubling down on its manufacturing capabilities with the launch of Intel Foundry Services (IFS) and its IDM 2.0 strategy, beginning with a USD 20bn investment for two new fabs in Arizona. Federal and state incentives are expected to be important for Intel as it builds out IFS, which is no doubt on the competition’s radar. “It remains to be seen the execution and their ability to deliver on their commitments and their strategy, but certainly I think that if you’re a Samsung or TSMC, you’re watching very closely,” the former GlobalFoundries SVP said. 

2021 was certainly a limelight year for the semiconductor industry, which is now at an inflection point thanks to recording-breaking demand and efforts to address capacity constraints. However, it is an extremely dynamic industry and there are several forces at play, such as its cyclical nature and continued COVID-19 disruption. Supply issues are still impacting many industries yet manufacturing facilities take a long time to build and bear fruit. Experts interviewed by Third Bridge Forum expect shortages to last for up to two more years or “until at least the middle of 2022” before a more normal supply-demand environment is reached. As the former VP at GlobalFoundries explained: “Whatever investments are made today, capacity will likely come online in 3-4 years, depending on market segment and technologies that are being targeted.”  

Looking ahead, we heard mixed views on the industry’s growth trajectory. With significant capacity beginning to come online in 2023, one expert believes it is “highly likely” that the market will enter a cyclical downturn for “a couple of years”. Speaking about automotive OEMs, a senior engineer at Future Electronics Inc remarked that sky-high prices might lead to a “spending stalemate” and in turn a dip in demand at the end of 2022 and into 2023. Another specialist we spoke to, however, had a more bullish outlook. A former SVP at Siltronic does not expect a “significant cooling off this year and next year” but noted that the shift to longer-term contracts and wafer loading guarantees do not reduce market volatility.