There always seems to be business representatives in the paper or on the television discussing semiconductors, even if their company doesn't make them. The same keyword is mentioned in each commentary -- 'shortage.' For an industry most consumers are unfamiliar with, it is receiving a lot of media attention.
To understand what is happening, we ask the question: 'Why is everyone talking about semiconductors?'
In 2021, the global semiconductor market grew by over 20% to $600 billion. The industry is forecast to grow at an annual rate of between 6% and 8% to reach $1 trillion by 2030. It is clear that the industry is massive, but where is the growth coming from and what issues does it face?
Three industries will drive 70% of the forecasted growth in the semiconductor market. These include automotive, computation and data storage, and wireless. The most influential growth driver will likely be the automotive industry. It represents 8% of demand but may reach between 13% and 15% by 2030. Autonomous driving and electric vehicles (EVs) will be the biggest drivers of this growth as EVs require significantly more semiconductors to produce than traditional combustion engines.
In the computation and data storage industry, we see more and more data centers springing up around the globe to satisfy the insatiable demand for cloud computing. These storage centers require enormous amounts of semiconductors to be operational, representing a growing sector for suppliers.
AI and 5G are also increasing in importance. The most influential growth vehicle in the wireless segment will be smartphones. This growth will predominantly occur in developing markets as they continue to amass wealth and develop a taste for luxury products.
The biggest issue facing the industry is supply chain management. Before the pandemic, manufacturers struggled to keep up with the unprecedented demand previously mentioned. Since then, shipping and transportation networks have become more complicated and expensive, while competition for labor has also increased dramatically.
The bulk demand for semiconductors is in western countries like the US, where the product is designed. However, these vital components are primarily produced in countries like Taiwan, which were both far away and severely affected by Covid-related shocks. This undiversified supply chain has proven to be particularly fragile and inefficient at delivering the components to distant customers on time.
Manufacturers also find it difficult to recruit highly skilled workers as demand for them has increased significantly, while supply is struggling to keep up. The tight labor market is driving up the wages for these workers also.
Taiwan Semiconductor Manufacturing Co. is the world's largest contract manufacturer of semiconductors. Other potential benefactors include Advanced Micro Devices (NASDAQ: AMD), Intel (NASDAQ: INTC), NVIDIA (NASDAQ: NVDA), and Qualcomm (NASDAQ: QCOM). Qualcomm is currently looking to join a consortium to buy a significant stake in UK chip designer Arm. The company is to be floated by its owner SoftBank after an acquisition proposal by NVIDIA fell through. The investment will allow Arm to remain independent and, therefore, neutral when dealing with current and potential clients.
While the industry is experiencing substantial growth rates, it is also important to note the many risks present. Stretched supply chains and labor shortages could have a lasting negative impact on the industry, hurting the valuations of these companies. The betas for the companies in this industry reasonably reflect the potential for either great returns or painful losses for investors.
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