Investment outlook for semiconductors amid rising global chip demand
Semiconductor companies may not be as headline-grabbing as their big tech counterparts such as Apple, Google and Facebook. But, as Money Mind finds out, chips drive some long-term trends in the investment world.
SINGAPORE: Semiconductor companies may not be as headline-grabbing as their big tech counterparts such as Apple, Google and Facebook.
The tiny devices, however, play a big part in the way we live and work. One such megatrend is working and learning from home - a trend that has been accelerated by the COVID-19 pandemic.
According to Mr Manish Bhatia, executive vice president of global operations at Micron Technology, the pandemic has created tremendous demand for connectivity and conferencing solutions around the world. This in turn has driven demand both in the cloud for the solutions that allow people to collaborate, as well as end-user devices such as personal computers and tablets.
Another megatrend that will need semiconductors is the 5G revolution.
The deployment of 5G infrastructure and 5G-enabled smartphones promises faster speeds and the ability to connect more devices at any one time.
5G will allow people to leverage the full potential of advanced technologies such as artificial intelligence. With faster speeds and more data from the 5G network, artificial intelligence can help process the huge amount of data more efficiently.
5G and artificial intelligence are also expected to drive the development of another megatrend - self-driving or autonomous vehicles. 5G-connected automated cars will be able to “talk” to one another, with their surrounding infrastructure and with traffic signals.
Mr Andrea Lati, vice president of market research at VLSI Research said: “The integrated circuit (IC) content in autonomous vehicles is huge because it’s essentially a computer on wheels. You need more ICs across the board, not just high-end. From power ICs that use trailing edge technology, to sensors and cameras. All of that is a huge driver for the semiconductor market across multiple segments.
Buoyed by these megatrends, the semiconductor market research firm is projecting that the market will grow about 12 per cent this year, following an 8 per cent increase in 2020.
Data from the Semiconductor Industry Association, which represents the US semiconductor industry, also suggests improving sales this year.
After a dismal showing in 2019, where sales fell 12.1 per cent from a record year in 2018, global semiconductor sales are expected to go up in 2021.
But can supply keep up with the demand?
“We are currently seeing very tight market conditions across the board. There are many shortages in many segments ranging from automotive to memory," said Mr Lati.
"This shortage that we are seeing will persist throughout the year and this year, I think, is just going to be a very tight year in terms of capacity and we are probably going to see price increases because of that,” he added.
Other experts are confident that the industry will be able to keep up with demand.
Mr Min Chen, head of China at Somerset Capital Management, noted that market leaders such as TSMC are expanding their capital spending to record levels as they look to hold on to their lead.
"We also see that domestic Chinese players are increasingly stepping up their capex expansion very aggressively,” said Mr Chen.
Tensions between the US and mainland China could heighten the supply crunch in the industry.
The trade war has turned into a tech war, with the US taking steps to restrict American companies from exporting technology, chip supplies and chipmaking equipment to Chinese firms.
Telecoms giant Huawei and China’s top chipmaker Semiconductor Manufacturing International Corp are among the casualties.
“The US sanction of some Chinese companies including Huawei and SMIC has caused a swing in both the demand and the supply side in a very short period of time. The challenge for Chinese players is obvious for the restricted access to US technology," said Mr Chen.
"The US players also have a lot to lose potentially because of the very high market share of Chinese players in the downstream applications such as smart homes, for instance where China occupies more than 50 per cent of the global shipments.”
Already, the automotive industry is feeling the chill. The sector has had to compete with other industries for chips.
According to the Semiconductor Industry Association, communications and computer devices made up 61.5 per cent of total semiconductor demand in 2019, while the auto industry only accounted for 12.2 per cent of total demand.
This has led to concerns the lack of chips will derail the autonomous vehicle megatrend.
For now, market observers believe the different megatrend themes remain intact, supporting the demand for semiconductors.
“We like the domestic Chinese players with mature technology, which can benefit from an increasing demand for self-sufficiency. A case in point is the company called HuaHong semiconductor that Prospect View China fund owns. We have a very high conviction level for the long-term development of that company to catch up in that arena," said Mr Chen.
"The second type of company we like is the true market leaders with the technology advantages, including TSMC. They can weather different cycles of industry and bring investors satisfactory return over a long period of time,” he added.
The sector has seen a fair bit of consolidation over the last five years, and a couple of big players with pricing power have emerged.
Mr Mario Morales, programme vice president of enabling technologies and semiconductors at IDC, said: “When you think about designs that are at 10 nanometer or 7 nanometer or even 5 nanometer. You're talking about a couple of hundred million US dollars of investment to design the chip itself. You need a market that supports that chip which is close to a billion dollars in size. That means that you're going to see a lot more consolidation in the space.
"Today, there's only three companies that are really still pursuing the leading edge and that's TSMC, Samsung and Intel. The rest are going to be more dependent on these companies to build their chips, or manufacture the chips that they design.”