Part 1: Navigating the Opportunity
The semiconductor industry is on the cusp of a new growth cycle.
A&M sees a path to a staggering $1 trillion global revenue in
the sector by the mid-2030s, up from the record revenue of $574
billion achieved in 2022.1
The remarkable expansion and opportunity are set against a
backdrop of increasing complexity within both the industry’s
own evolving dynamics and the broader geopolitical landscape. Such
complexity is expected to usher in an era of change, challenging
companies to adapt the ways they operate in all aspects of the
business while adapting to the shifting customer and value chain
landscapes.
Join our team as we embark on a series of papers first seeking
to understand the sources of the opportunity as well as the
increasing complexity and key implications, then exploring specific
strategic areas. The series will explore, among some of the topics,
how companies can:
- Adapt their talent recruitment and development
processes; - Improve their selection and execution of research
and development (R&D) projects; - Better hone their go-to-market efforts;
and - Make more strategic capital expenditure (CapEx)
decisions
A Trillion-Dollar Global Industry
The global semiconductor industry reached a peak revenue of $574
billion in 2022 while 2023 saw a 9.4 percent decline — not
unexpected in a typically cyclical industry. We are now on a new
growth path fueled by advancements in artificial intelligence (AI)
and other innovative applications like automotive Advanced Driver
Assistance Systems, or ADAS, and many more. The speed at which
these technologies are expanding is considered rapid even by
seasoned industry experts.
The World Semiconductor Trade Statistics (WSTS), which tracks
data and trends in the industry, expects a rebound from 2023 and
forecasts 2024 revenue growing at 13% and topping the previous
record at $588 billion, driven by a strong recovery of the memory
segment and robust performances by logic and microelectronic
semiconductors. A&M’s expectation is that the growth will
continue beyond 2024 and, despite the inevitable corrections in
between, we expect the industry to surpass the $1 trillion mark by
the mid-2030s (Figure 1).
Semiconductors are and will continue to be at the core of the
key technologies that ensure our productivity, national security
and way of life, and new and exciting applications will almost
certainly drive specific market sub-segments.
The first major driver appears likely to come from technology
players and their customers who are racing to develop artificial
intelligence platforms and use cases. The first step is to
establish the hardware platform — the actual foundation on
which complex models can be trained and run. We see this effort not
only in the recently released quarter earnings from one of the
early AI semiconductor leaders, NVIDIA, showing a staggering 265
percent revenue growth from the prior year,2 but also in
the reports that Sam Altman, CEO of OpenAI, is seeking partners to
enter the semiconductor design and manufacturing business
directly.3 More evidence indicating a focus on the
foundational hardware is Intel’s recent announcement that it
will develop custom chips for Microsoft4 and in the $52
billion CHIPS and Science Act that the U.S. Government has
allocated to the industry.
The second step, once the foundational hardware is available, is
for companies to go beyond the hype and develop robust use cases
for AI. Despite the dream of a true artificial general intelligence
(AGI) promising to solve any kind of problem, companies still need
to hone the models and perfect the platforms for their own
environments. This will spur even more requirements for the
hardware and continue the cycle of innovation.
The Automotive segment is another very promising end market. We
expect the segment to reach $300 billion by the mid-2040s, up from
approximately $40 billion to $50 billion at the beginning of this
decade. Despite some short-term woes, the interest in electric
vehicles continues to grow5 and the momentum of Chinese
manufacturers, especially in Asia and Europe, will help drive
prices down and demand up.6
Finally, it is important to remember that while leading-edge
technologies often trigger exciting news, segments like industrial
and even some automotive applications rely on more proven
technologies still manufactured on 200 mm wafers, and the
investment opportunity lies in strengthening or expanding the
ecosystem, as we argued in our prior papers.7
Dissecting the Complexity: Understanding the Variables
Semiconductor design and manufacturing have always pushed the
limit of what is possible. When Intel co-founder Gordon Moore
predicted in 1965 that transistors on an integrated circuit (IC)
would double every year for the next 10 years (later revised to two
years), it was amazing to have up to 100 transistors per IC. Today,
companies are working on “50 billion transistors on a chip the
size of a fingernail” and features as small as 1 and 2
nanometers,8 essentially the diameter of a human DNA
strand! The innovation and resources that make it possible to
design and manufacture at such a small scale cannot be
underestimated. To put this in perspective, today there is only one
company in the world, ASML, that can manufacture the key EUV
(extreme ultraviolet) lithography tool that makes this
possible.
Designing at such small scales requires novel design and
simulation techniques,9 new packaging materials and
layouts, such as 3D stacking and heterogenous packaging, and new
testing techniques. In each one of these areas, we see incredible
feats of innovation and the early adoption of new tools and
techniques.
New design architectures could emerge that can potentially upend
the industry, exactly what happened when ARM embraced a different
architecture for mobile devices in contrast with Intel’s
approach at the same time. Additionally, on top of the complexity
of designing and manufacturing these small devices with repeated
and economically viable yields and cost at scale, the industry
faces increasingly harsher and more demanding requirements, such as
in automotive or consumer applications.
The industry complexity doesn’t show any sign of slowing
down and the players will need to continue investing resources in
the form of money and talent to remain competitive.
Industry and Geopolitical Dynamics: a Closer Look
As wonderfully recounted by Professor Chris Miller in his book
“Chip War: The Fight for the World’s Most Critical
Technology,” the semiconductor industry that was originally
encouraged by the U.S. government has evolved into a complex,
globally connected and highly interdependent business requiring
billions of dollars to continue to grow. Globalization in the
industry, companies locating certain steps of the supply chain in
lower-labor-cost and economically-friendly countries and businesses
specializing in specific sub-steps within the value chain made the
industry the size it is today.
Unfortunately, recent years’ events highlighted the
challenges resulting from such globalization and interdependence
coupled with the high costs that prevented any redundancy. Issues
ranging from climate-driven challenges that constrained water usage
at the leading foundry10 to global pandemics,
accidents11 and frigid winter conditions12
that forced the closure of key manufacturing facilities have
strained the existing supply chain.
This, in turn, triggered the panicked reaction of customers and
manufacturers that induced a massive bull-whip effect and huge
order backlogs. Geopolitical instability created another layer of
challenges. Prolonged wars have limited certain raw materials while
trade tariffs and outright trade limitations lowered or prevented
shipments of certain devices to specific countries and
customers.13
Governments all over the world have responded with investments
to prop up manufacturing on national soil, but this is unlikely to
completely solve the issue given the prohibitive amount of money
needed to open new Fabs. This opens the door for private investment
to step in and reap the benefits of expanding the ecosystem, as we
outlined in prior papers.
Implications on the Semiconductor Industry
The increased complexity and geopolitical uncertainty are
forcing companies to devise new ways to do business. The increased
costs to build new advanced manufacturing facilities have forced
companies to move past statements such as “real men have
Fabs.”14 Additionally, semiconductor talent is no
longer as easily available as it once was — the Semiconductor
Industry Association predicts a shortage of up to 67,000 workers by
203015 — and job opportunities have extended
beyond the core industry into automotive and technology companies,
thus increasing competition for the available talent. While there
was a time when Chinese customers represented a great new
opportunity for semiconductor companies, this situation has been
limited by trade restrictions and China’s development of its
own supply chain.
This is an opportunity for companies to think about their supply
chains, their investments, their customers and their talent in a
new way.
Challenges and Opportunities for the Industry and its
Investors
We recently discussed how the U.S. CHIPS Act is creating novel
investment opportunities for Private Equity investors both in the
U.S. and in Latin America.16 We now contend that
companies have the opportunity to rethink their overall business
strategies. For example, they can reconsider their go-to-market
approaches by updating which customers they serve and how, their
supply chain plans by deciding where to manufacture or source their
products, their R&D investments and their talent management
policies, among others.
As the industry changes, existing proven approaches may no
longer work in the sector; for example, employees’ benefits
structures and hiring processes might need to change and new growth
and investment areas might appear.
We believe that a time of change is a time of opportunity.
Join us as we explore the implications of the increased
complexity and uncertainty that the industry must navigate as it
grows toward the trillion-dollar mark.
Footnotes
2. NVIDIA Corporation – NVIDIA Announces Financial
Results for Fourth Quarter and Fiscal 2024
3. Sam Altman Seeks Trillions of Dollars to Reshape
Business of Chips and AI – WSJ
4. Intel Launches World’s First Systems Foundry
Designed for the AI Era :: Intel Corporation (INTC)
5. People want to buy EVs. Why are electric car sales
so sluggish? : NPR
6. China’s electric carmakers take on Europeans
on their own turf : NPR
9. What is AI Chip Design? – How it Works |
Synopsys
10. The Chip Shortage Is Bad. Taiwan’s Drought
Threatens to Make It Worse. – WSJ
11. Japan’s Renesas sees fire-damaged chip plant
back to full capacity by mid-June | Reuters
12. Severe Winter Weather In Texas Will Impact Many
Supply Chains Beyond Chips (forbes.com)
13. Exclusive: Russia’s attack on Ukraine halts
half of world’s neon output for chips | Reuters
14. Real men have fabs…or do they? – EE
Times
Originally published by 26 March, 2024
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