Romantics may argue that love makes the world go round; realists would suggest that it is semiconductors. Semiconductors are an essential component of every electronic device, from computers, to cars, to electronics. Developments in semiconductor power and functionality have enabled advances in almost every major technology, including artificial intelligence, electric cars, clean energy and transportation.
In particular, improvements in semiconductor technology during the past 50 years have made electronic devices smaller, faster, and more reliable. Developed in 1965, Moore’s Law suggested that the number of transistors on a microchip would double every two years, allowing processing power to increase. This has proved a robust theory for almost 60 years, with microchip development a powerful force in driving technology innovation.
The Semiconductor Industry Association points out that a single semiconductor chip now has as many transistors as all of the stones in the Great Pyramid in Giza. There are now more than 100 billion integrated circuits in daily use around the world. Semiconductor demand is increasing all the time as areas such as car manufacturing or artificial intelligence ('AI') demand more chips, and chips with increasing complexity. McKinsey forecasts that it will be a trillion dollar industry by 2030.
The semiconductor supply chain is increasingly complex and inter-dependent. While individual companies used to design, build and manufacture semiconductors, increasingly these activities are undertaken by different companies with great levels of specialisation. This is a measure of the rising complexity of each area.
At the start of the chain are the ‘fabless’ firms. These design and develop new chips, but do not make them. They will outsource the manufacturing of chips to a specialist foundry. Examples of fabless firms are Qualcomm, Broadcom, or Nvidia. These companies will operate with various degrees of specialty. Nvidia, for example, has become well-known for its expertise in AI-focused chips, having built its business manufacturing semiconductors for gaming.
Companies that focus only on manufacturing are known as ‘foundries’, or ‘fabs’. The largest and most important is the Taiwan Semiconductor Manufacturing Company ('TSMC'), which was started in 1987. TSMC produces the majority of Taiwan’s semiconductors, which are 60% of the world’s supply and 90% of its most sophisticated chips. Until recently, TSMC only made its most advanced chips in Taiwan, but increasingly it is being incentivised to develop manufacturing plants in other countries, notably the United States ('US'). United Microelectronics Corporation is the other major Taiwanese chip manufacturer.
Other notable manufacturers of semiconductors include Samsung in South Korea, and US-domiciled GlobalFoundries, which was a spin-off from Advanced Micro Devices. Semiconductor Manufacturing International Corporation is mainland China's most advanced and largest foundry.
There are still companies that design and manufacture chips, usually known as integrated device manufacturers. These include familiar names such as Intel, IBM, Analog Devices, Micron and Texas Instruments. These tend to focus on more generic chips, rather than the sophisticated chips designed by Nvidia and manufactured by TSMC.
There are also important suppliers to semiconductor designers and manufacturers. Of these, Netherlands-listed ASML is a good example. It designs and builds the systems and software used in the production of semiconductor chips. It is the only company in the world that currently manufactures extreme ultraviolet ('EUV') lithography machines, which enables the production of smaller, faster, more powerful microchips through the use of a shorter wavelength of light. There are others involved in the supply chain, such as semiconductor testing groups and specialist distribution.
Semiconductors have historically been considered a cyclical industry. There has tended to be greater demand during buoyant economic conditions when companies and individuals bought more technology equipment. Today, however, technology is so embedded in the way people work and live that this cyclicality is less apparent. Electric cars, for example, have far greater semiconductor content than internal combustion engines cars - up to $1,500 for a high-end EV compared to only $500 in a petrol car
Equally, semiconductors are now more sophisticated. They are not merely a ‘widget’, but are increasingly specialist rather than commoditised. In 2021, Tesla announced plans to manufacture its own semiconductors, saying that its needs had become too specialist and it wanted to avoid supply chain disruption. Semiconductors are necessary for the growth of AI, allowing the data storage and analysis that trains machines to complete tasks normally requiring human intelligence.
Mounting geopolitical tensions across the world have highlighted the need for semiconductor independence. Companies and governments around the world are aware of the fragility of having the majority of chip manufacturing concentrated in Taiwan, a disputed territory claimed by China. This has left governments scrambling to build semiconductor manufacturing capabilities and know-how.
The US Chips and Science Act, for example, sought to incentivise domestic production of chips, and knock China out of its supply chain. The investment in semiconductor and clean tech investments is almost double the commitments made in the same sectors in the whole of 2021, and nearly 20 times the amount in 2019, according to data compiled by the Financial Times.
Intel started building two new foundries in Chandler, Arizona in 2021, a $20 billion investment, and has more recently created an advanced packaging facility in New Mexico. Micron has invested £15bn in foundries. Perhaps most importantly, TSMC started building a chip plant in Arizona in 2020 and has recently sent over more workers to speed up construction.
The European Parliament recently approved the Chips Act, which aims to double the region’s semiconductor market share by 2030. It puts similar protections in place. The Netherlands, conscious of ASML’s integral place in the semiconductor supply chain, recently enacted new regulations around the export of advanced semiconductor production equipment, under which companies would need to apply for an export license as of 1 September 2023.
In 2005, Gordon Moore (of Moore’s Law) admitted there may be physical limits to his long-held law: “the fact that materials are made of atoms is the fundamental limitation and it's not that far away...We're pushing up against some fairly fundamental limits so one of these days we're going to have to stop making things smaller”.
Another problem is that semiconductors as they exist today are energy-hungry. There are now a vast number of devices, from cloud computing to Internet of Things devices, and this is going up all the time. At a time of greater scrutiny on how we source and use energy, this may also prompt changes in the semiconductor sector, leading companies to seek out more sustainable options.
Against this backdrop, it is possible that semiconductors might start to look a little different. Companies are starting to look for alternatives to silicon, for example. Alternative materials such as graphene, carbon nanotubes, or other novel semiconductor materials may replace or supplement silicon, offering better performance, lower power consumption, and increased functionality. In January 2024, the New Scientist reported that the first working graphene semiconductor had been created. This could pave the way for a new type of computer with greater speed and efficiency.
It may also be possible to improve existing semiconductors by changing the packaging around the semiconductor wafers. This packaging connects semiconductors to their environment and protects them from contamination and damage. McKinsey says this part of the chip has been undervalued: “This may change with the introduction of advanced packaging, which uses sophisticated technology and aggregates components from various wafers, creating a single electronic device with superior performance. Introduced around 2000, advanced packaging is now gaining significant momentum as the next breakthrough in semiconductor technology.”
The semiconductor industry is vital for almost every technological development happening in the world today. It has had to adapt to new demands, and will have to adapt again, but the technological world could not turn without it.
