Investing in semiconductors

Semiconductors encapsulate a wide range of components integral to the functionality of a broad array of technological devices
As technology continues to expand its scope in our daily lives, our reliance on semiconductors necessitates growth and expansion in this important industry. Semiconductor use covers a wide range including electronics, industrial equipment, autos, networking and communications, and data processing
Experts predict the size of the global semiconductor market could exceed US$750bn by 2030, driven by key use areas such as data storage, wireless communication, and automotives/autonomous driving.
While recent U.S. and European legislation has positioned for semiconductor production onshoring, semiconductor fabrication spans across regions.

What are semiconductors?

Semiconductors are a broad term used to describe devices that have an electrical conductivity level between a conductor and a non-conductor or insulator^[1]. In more practical terms, semiconductors refer to a wide range of components that are integral to the functionality of technological devices spanning phones, computers, energy production and electricity, transportation, and healthcare among other use cases. Semiconductors play an essential role in our day-to-day lives, and Intel estimates^[2] that the average American spends over 12 hour a day on electronic devices that are powered by semiconductors.

“A single smartphone today has more computing power than the computers used by NASA to land a person on the moon in 1969"

- Semiconductor Industry Association (SIA)

Semiconductor materials are commonly manufactured with silicon, the Earth’s second most abundant element. Silicon comprises approximately 28% of the Earth’s crust^[3], and provided a stable single crystal structure that provides the foundation for orderly arrangement of other elements. In silicon, at low temperatures, no electricity passes, but at high temperatures, electricity passes through easily.

The semiconductor industry is highly dependent on ongoing research and development, which has helped drive tremendous advancements in computing power and other across other applications. The exponential product advancement, commonly referred to as “Moore’s Law”, can be illustrated with a simple anecdote from the Semiconductor Industry Association (“SIA”): “a single smartphone today has more computing power than the computers used by NASA to land a person on the moon in 1969”^[4]. According to the SIA, research and development is an integral component of semiconductor manufacturing, accounting for nearly one-fifth of revenue reinvestment, second only behind pharmaceuticals in the United States.

The strategic importance of semiconductor technology and manufacturing is evident at a global level, with countries across North American, Europe, and Asia engaging in the raw materials mining and fabrication of semiconductor components. In the coming decades, one might expect the geographical landscape to reflect geopolitical and supply chain considerations. Nonetheless, we believe growth in demand for semiconductor components is likely to be realized across the globe for the foreseeable future.

Cyclical pricing, structural demand growth

As with many consumer products, there is an element of cyclicality to the prices of semiconductor components. Memory prices can fluctuate with a wide range of supply and demand factors, resulting in restocking and destocking phases for semiconductor manufacturers. Production and logistical issues can arise as well, as witnessed during the COVID-19 crisis. With the significant high fixed cost nature of the Semiconductors industry, margin pressures have the potential to be higher, particularly during periods of demand weakness.

Although semiconductor pricing may experience shorterterm price volatility as a function of cyclical trends or supply chain disruptions, we believe the strategic outlook for semiconductor demand is quite robust. According to McKinsey, the overall growth in the global semiconductor market is expected to nearly double over the next decade, driven by key use areas such as data storage, wireless communication, and automotives/autonomous driving. Figure 1 illustrates McKinsey’s growth projections for the global semiconductor market across verticals.