How to make money on scarce semiconductors. Investor's digest

The information hype surrounding the shortage of chips and its impact on rising car prices left behind the scenes more interesting investment targets - the growth of the semiconductor market.What is happening in the $500 billion market - in the investment digest Big trend

Where to watch: shares of TSM, SMSN, STX, WDC

Semiconductor manufacturing has suddenly become a key industry in the world economy and its role will only grow.

The news background around the topic of the shortage of chips comes down to an acute shortage in the automotive industry, which in fact accounts for less than 10% of global demand for semiconductors. But chips have become the “brains” of virtually every consumer and industrial product, from game consoles and phones to machine tools and solar panels. The semiconductor manufacturing industry, which today is about $500 billion in size, is unique in its kind: 1) a high degree of specialization in redistribution, that is, oligopoly at several stages; 2) high science intensity of each stage - the inability to quickly copy and recreate the production process or product; 3) a truly global value chain - everyone is dependent on each other; 4) the inability to quickly solve certain key technological problems with huge investments or poaching personnel. At the same time, the trend of growth in demand for chips is gaining momentum. According to various estimates, by 2030 the size of the industry will double. Moreover, the memory chips segment will grow at a faster pace, which can grow three times and exceed $400 billion. The growth of the semiconductor market is a unique long-term investment opportunity, given the importance of the industry and its unique structure.

Don't miss out

In recent years, many technology companies in various industries, even in the automotive and telecom industries, have begun to develop their own processors and chips, as the industry structure allows them to be produced at third-party facilities without their own factories: Chip-as-a-Service guarantees high margins for processor creators and stable download for contract manufacturers. The leaders of the technological world see in the creation of their own chips not only a competitive advantage, but also an opportunity for additional profit. So did Apple, replacing Intel products with its own M1 processor. Google is following the same path and plans to equip Chromebook laptops with chips of its own production by 2023. Google's next generation of Pixel 6 smartphones will also use its own Tensor processor. A significant amount of demand - more than 50% - falls on chips produced using 20-year-old technologies - mainly for household appliances and cars. Many experts hope that it is precisely through such industries that the massive shortage of semiconductors can be reduced more quickly. Restoring the balance between supply and demand is likely to be delayed until mid-2022. The main reason is a long investment and production cycle, which determines the impossibility of a quick reaction of companies in the industry to changes in market conditions due to the specifics described above. Restoring the balance between supply and demand is likely to be delayed until mid-2022. The main reason is a long investment and production cycle, which determines the impossibility of a quick reaction of companies in the industry to changes in market conditions due to the specifics described above. Restoring the balance between supply and demand is likely to be delayed until mid-2022. The main reason is a long investment and production cycle, which determines the impossibility of a quick reaction of companies in the industry to changes in market conditions due to the specifics described above.

Important figures

The annual profit of companies in the industry reaches $100 billion. The largest demand for semiconductors comes from computer manufacturers - 34% with orders of just over $160 billion and wireless device manufacturers (including phones) - 27% - $127 billion. The semiconductor industry has the highest share development costs (R&D) - 22% of revenue and the most significant amount of capital expenditures - 26% per year. Samsung is the world's largest manufacturer of memory chips, accounting for 42% of the DRAM chip market and a third of the NAND chip market. Its biggest competitors are Seagate and Western Digital. An interesting fact: the production of a chip for a phone or computer requires the successful completion of more than 700 iterations with more than 99.99% accuracy at each step, which takes more than 60 days in time.

Source: Spectrum, BCG, Barron's, The Verge

Subscribers of the tariff “Pro. Investments” receives such digests by mail every Friday. Five minutes of reading - and you are aware of the most relevant global economic and technological trends for investors that affect your investment portfolio every day. Economist, investor and founder of Barbacane Research Valery Senko and his team monitor hundreds of sources looking for trends and signals to identify companies with growth potential. The list of sources includes The Financial Times, The Wall Street Journal, Bloomberg, Nikkei Asia, Reuters and other reputable publications.