The Silicon Platform Global Economy is built upon
By: Madhav Bajaj
Tags: Samsung, Global Economy, Tsmc, Semiconductors

These multi-billion dollar fabrication plants also command exorbitant operating costs. According to the nonprofit organization China Water Risk, they require extensive freshwater supply, around 20,000 tons per day. Taiwan accounts for 63% of the global foundry market, and its fab consumes 10% of the island’s water supply. Plants have to maintain colossal vacuum-sealed room for certain subprocesses as even a single dust particle can render a wafer useless, bringing the yield down dramatically. Equipment requires efficient power infrastructure and highly skilled labor. To finally complete the manufacturing process, Foundries and IDMs employ Outsourced Semiconductor Assembly and Test (OSAT) companies for a majority of the orders.

Ancillary Industries

It takes a complex web of highly sophisticated corporations, each with decades of research and development in their respective field, to make a microchip. Chip Designers and Fabs are only a part of this web; the peripheral organizations around them are just as fascinating as they are.

When a company decides to design a chip, they don’t start from the ground up. All chips need a definite set of rules to communicate with the hardware and perform the most elementary functions. In other words, they require an Instruction Set Architecture or ISA. While chip designers could come up with their own ISA, they don’t because it would be disastrous. The interoperability between multiple operating systems and software processors from various designers enjoy today is only enabled by a standardized ISA. Processors from Intel and AMD can run Linux, Windows, and macOS, only because they use the x86 architecture. Similarly, smartphone processors like Samsung’s Exynos, Qualcomm’s Snapdragon, and MediaTek’s Helio can run Android because they work on the ARM architecture. Apple’s M1 is also powered by ARM. These ISAs are patented; Intel and AMD own most of the x86 Intellectual Property (IP), while the ARM ISA is controlled by a British company of the same name.

ARM takes a unique position within the semiconductor industry ecosystem. Although it is a chip designing firm, the company posses some of the most valuable IPs in the industry and obtains most of its revenue through royalties and licensing its ISA and reference designs. ARM-based chips power more than 125 billion devices. The firm held in high regard, so much so that the UK Government blocked its $40 Billion acquisition by Nvidia on the grounds of National Security concerns.

Source: Global Market Monitor

Microchips are intricate objects. Designers need powerful tools to develop them, tools capable of mapping billions of transistors and inter-connections across multiple layers. Manufacturers need similar tools to model their manufacturing process and predict results. Electronic Design Automation or EDA fulfills these industry requirements. EDA firms like Synopsys, Cadence and Siemen’s Mentor Graphics provide sophisticated and complex software programs that assist in designing, simulating, and verifying logical and physical aspects of a chip. The development of Artificial Intelligence and Machine Learning has brought forth a paradigm shift within the EDA community as these tools evolve to complement the advancement in process nodes.

An article on the global semiconductor industry ecosystem won’t be a great one if it does not mention ASML. The Dutch-based company has historically been the market leader for lithography technology, an essential process in which light from a powerful source is directed onto a wafer through a photomask, engraving the chip design. To build chips with the latest process nodes (5nm and 3 nm), foundries need equipment that can generate light beams with smaller wavelengths. ASML’s Extremely Ultra Violet (EUV) photolithography machines are the only devices in the world with such capability, essentially making the firm a monopoly in a very niche but immensely important market.

Lithography Process, Source: Seeker

Intel and AMD first began studying EUV in the 1990s but were never able to make a functional device as engineers across the country deemed the venture impractical. ASML’s key competitor in lithography, Nikon, didn’t even attempt to delve into EUV research. Despite EUV’s notoriously reputation, ASML commissioned a full-fledged study in 1999. After decades of research, numerous prototypes, and cracking countless engineering challenges, the company released its first EUV machine in 2017. Scientists around the world have hailed the technology as revolutionary, calling it the most complex machine humanity has developed. Within this incredible device, a dripper releases 50000 drops of molten Tin every second, and each drop, smaller than the diameter of a human hair, is intercepted by two high-powered laser beams, the first one to energize it and the second to create a plasma which emits the EUV light used to conduct the lithographic process.

An ASML EUV Machine, Source: Quartz

Each ASML EUV machine costs around $150 Million, takes up the size of a school bus, and contains around 100,000 parts and 2 kilometers of wiring. Shipping a single unit requires 40 freight containers, 3 Boeing 747s, and 20 trucks. The company ships only about 25 of them annually, primarily to TSMC, Samsung, and Intel.

ASML has secured a seat at the very heart of the semiconductor industry. Protection of the company’s IP is of International importance, as Americans and Europeans contend with China’s state-sponsored corporate espionage.

Source: SemiWiki

Another firm quite similar to ASML in terms of influence through a highly advanced product is Lam Research. Lam’s products enable the production of memory chips, a $100 Billion market, accountable for around a quarter of the global semiconductor industry’s revenue. It’s the only provider of high aspect etching tools, a vital device for NAND memory chip manufacturers. Along with Applied Materials, Tokyo Electron, and KLA, ASML and Lam form the majority of the Water Fabrication Equipment or WFE market

Investment Pitfalls and Future Concerns

Investing in companies that quite literally power the global economy looks very lucrative. After all, PHLX Semiconductor Index provided around x3.3 returns compared to S&P 500 over the last five years. But certain pitfalls and concerns regarding the future outlook must be addressed first.

Cyclicity

No sector in the world is susceptible to cyclical booms and busts as much as the Semiconductor industry. A market downturn has occurred every 4–5 years for the previous 30 years, with each lasting 12–15 months on average. This is typical because of the rate of technological obsolescence industry experiences. When technological advancements are introduced, the sector experiences upswings, resulting in strong demand and a limited supply of advanced items. Firms ramp up capital expenditure, but expanding production is a herculean task. Chips from the new plants hit the market only after 3–4 years. During this period, demand subsides, resulting in oversupply and, consequently, market downturn. Give the dependence of the Memory chip segment on personal devices and electronics. It experiences the worst of this cyclicity.

Source: Counterpoint Research

Source: CSIMarket

China

The most immediate threat to the global semiconductor industry would be China’s ambitious target of being completely self-sufficient in the semiconductor industry by 2035. China is the biggest consumer of semiconductors, which accounted for around $300 Billion of imports in 2019. Only 30% of the demand is satisfied domestically, and the CCP is desperate to change this as Western nations grow increasingly protective of their companies. The provincial status of Taiwan, the world’s largest semiconductor manufacturer, makes the situation far more precarious. IP theft is a very real threat global semiconductor firms face today, and several instances serve as a cautionary tale.

· Arm’s Chinese JV recently went rogue as CEO Allen Wu launched his own company called Alphatecture, with Arm’s stolen IP. Wu offered existing Arm China customers steep discounts to invest in Alphatecture instead. The parent firm immediately moved to block any IP transfer with the Chinese branch but reports state that the loss was considerable.

· Intel and AMD hold most of the patents related to the x86 architecture, and their cross-licensing agreement makes it essentially impossible for a third party to enter the CPU market. It only was after Intel was sued by the Federal Trade Commission (FTC) that a license was awarded to a relatively unknown company called VIA Technologies. But this license won’t be renewed anytime soon as VIA entered a JV with the Shanghai Municipal Government to create Zhaoxin. Using VIA’s license, Zhaoxin has released a series of “home-grown” CPUs.

· In 2003, TSMC sued Semiconductor Manufacturing International Corp or SMIC, China’s biggest foundry, over theft of trade secrets and patent infringement. While both reached a settlement in 2005, SMIC broke the terms of the agreement. A Californian jury convicted SMIC on all counts in 2009.

· In 2019, Chinese chipmaker Fujian Jinhua was indicted on charges of stealing trade secrets from US memory chip giant Micron Technologies.

The prophesied death of Moore’s Law

Moore’s Law is just a prediction, but it has defined the technological trajectory of this industry. It has shaped how chip designers model their following products and how foundries and several firms spend their capital, always providing assurance of perpetual growth within the community. But after half a century of correct predictions, several experts say Moore’s Law is dead. It’s still a hotly debated topic, as these experts have been wrong before, but we are steadily approaching the level of scale where the size of the atom itself becomes the bottleneck. When the time arrives, the industry will have to undergo a fundamental change, developing technology significantly different from what it has been working on for years, potentially stagnating future growth prospects.