The chips that matter

Since its advent, semiconductors have revolutionized the way we live, work, learn and play. Still, the industry’s massive potential and opportunity lie ahead of us, thanks to artificial intelligence and the continual advancements in this space. Semiconductors are expected to facilitate some of the world’s major inventions as we race towards a digital future.

After years of being in the shadows of large technology companies, the semiconductor (“semicon”) industry is coming back into the limelight. According to a McKinsey report, artificial intelligence (“AI”) will be a game changer which could allow semiconductor companies to capture 40 to 50 percent of the total value from the AI technology stack. Meanwhile emerging technologies such as autonomous driving, 5G and Internet of Things suggest that semicon companies are poised to put up the best show in decades by capturing the most value in computing/processing, storage/memory, and communication/networking.1

Global semiconductor sales have been on an uptrend since the 2008 global financial crisis, hitting the industry’s highest-ever total in 2018. While 2019 data shows a decline, the industry is expected to recover in 2020.2 The McKinsey report also revealed that AI-related semicons will see growth of about 18 percent annually over the next few years—five times greater than the rate for semicons used in non-AI applications.

Prime growth catalysts

As AI becomes more mainstream, the demand for specialised AI chips will rise. The AI chip is typically designed to improve from past experience and an embedded machine learning function means that once a lesson is learned, it does not necessarily have to be relearned. And within machine learning is deep learning which has been the key driver in the advanced ability of computers to perform tasks like speech recognition and computer vision.

AI’s potential is big; AI-derived business value is forecast to reach $3.9 trillion in 2022 according to Garner Inc.3 The AI chip market will see massive growth (see Fig 1) and will likely transform many industries. The automotive market will offer the largest market potential due to higher penetration rates of electric and hybrid autos and the move towards autonomous vehicles. Other industries that will see fast growth include the industrial market, underpinned by the security and healthcare sectors.

Fig 1: Global AI and AI chip market size4

Chips-that-matter_Fig1

The Internet of Things (IoT) is another important growth source for semiconductor companies given the rising demand for more sophisticated connected technologies. Semiconductor chips power the IoT devices and allow them to achieve remote connectivity. The convenience and efficiency of these devices make them popular and semiconductor companies will benefit from the growth of IoT. By 2025, there will be more than 75 billion installed IoT devices worldwide.5

The battle for AI processors heats up

Processors are the backbone of all the computing power we enjoy today, and AI processors are driving the next big wave of growth. AI processors can handle large scale computational tasks much faster than regular processors.

The segment has been long dominated by one single player with a distant second player. Of late, we are seeing strong dynamic shift, the traditional underdog seems to be adopting a more aggressive and innovative approach and chalking up more notable releases with new AI processors facilitating a future where AI is everywhere.

As a result of this fierce competition, the value of the processors has increased significantly in that the new designs deliver greater performance for a fraction of the cost. The ultimate beneficiaries are the consumers, who are now able to enjoy advancements in computing performance at lower prices.

The lowered cost of computing power also brings huge benefit to the software or service that is built on those chips. Cloud computing, data centres will be cheaper to build and run. Likewise, it will be faster to develop and deploy AI and Software as a Service model (SaaS). China, being the aggressive contender in such areas, will obviously benefit in multiple ways.

A deeply interconnected global value chain

The unrelenting demand for better product capabilities, features, reliability etc. led to the current business operating models. Semicon companies can either be integrated device manufacturers or be part of a fabless-foundry model (see Fig 2). In the latter model, the chip design and the chip manufacturing are done by separate companies as is the testing and packaging.

Fig 2: Semiconductor Operating Models6

Chips-that-matter_Fig2

The industry’s value chain is in fact geographically widespread and offers many benefits such as employment and export opportunities, for participating countries. In the current ecosystem, the US still maintains dominance over design while the manufacturing bigwigs are in South Korea, Japan and Taiwan. China is one of the leaders in testing and packaging.

The packaging is the last stage in the production process during which the chips are encased in material that not only protects but also promotes the electrical conductivity. Companies who perform the integrated circuit packaging and testing are often referred to as OSATs.

The global OSAT market was worth USD 28 billion in 2018 and the top-10 players commanded a combined 84% share with three of the top-10 being Chinese companies.7 The market is expected to register a compounded average growth rate of 6% over the forecast period 2019-2024 underpinned by the growing popularity of wearables.8 The trend for these devices to become more flexible and perform under harsh conditions is going to underpin the growth of this market. New and existing OSAT players will be forced to innovate and cater to the new specifications.

China poised to reap benefits

China is emerging as a major market for OSAT. Chinese semicon packaging companies stand to benefit from the rapid dynamic shift in the processor market as some are direct and sole OSAT for the latest node. The Chinese government has also pledged their support for OSAT providers in their “Made in China 2025” plan.

China's semiconductor packaging and testing market is thus growing rapidly. They have also been encouraged to build closer ties with their users by participating in the design of new products to move up the value chain. Besides, it is much easier for packaging companies to expand and redesign compared to design and manufacturers.

Thanks to the growing demand from Huawei Technologies and increase in orders from overseas markets, capacity utilization rates of OSAT manufacturers rebounded rapidly. In fact, the top three OSAT players are expected to increase capex in 2019/2020 to expand capacity.

Further, one major Chinese OSAT player is poised to enjoy the benefits of being the sole partner of a leading chip designer. Their new chip design is based entirely on the new 7 nanometer (nm) processor chip which has clinched the performance crown in all 3 segments {desktop computers, backend servers and the graphics processing unit (GPUs)} for the 1st time in a decade.

As the battle for supremacy heats up in the most profitable section of the semiconductor industry, i.e. the chips, Chinese OSATs stand to benefit. Not only will volumes pick up, the increased complexity involved in packaging and testing the 7nm chip will enhance price and margins for OSATs.