Sales of semiconductors expanded globally, growing at a compound annual growth rate of 7.18% per year, from $139.0 billion in 2001 to $555.9 billion in 2021. The global semiconductor market is predicted by WSTS to increase by double digits in 2022 after posting a good US semiconductor industry growth of 26.2% in 2021. All geographical areas are anticipated to have growth in 2022. The Asia Pacific, the largest region, is anticipated to rise by 10.5%. Europe is predicted to increase by 14% , Japan by 14.2%, and the Americas by 23.5%.

Why are semiconductors so important?

Memory chips are an example of a semiconductor that are essential to every growing technology project. Semiconductors have impacted everything, including smartphones that rely on Artificial intelligence (AI), the IoT or Internet of Things, 5G, or the automotive sector. There is nothing left untouched by semiconductors, thus also affecting the US auto stocks. Semiconductors or chip is used to power technologies that enrich the lives of consumers and make businesses run smarter, faster, and more efficiently.

Understanding the value chain

Companies across the semiconductor value chain operate in different processes and technologies (like design, fabrication, and assembly) in pursuit of economic efficiency. However, no region has achieved strategic autonomy in the industry. U.S. fabless companies rely on foundries in Taiwan to manufacture the chips. The foundries, in turn, rely on equipment, chemicals, and silicon wafers from the U.S., Japan, and Europe. Thus, the technological complexity and need for scale have led to the emergence of a large number of players with business models focused on a specific layer of the semiconductor value chain.

Exhibit 3: The total number of countries participating in semiconductor manufacturing is significant

Source: Accenture.com

The semiconductor market is truly international. Worldwide, semiconductor chip developers use intellectual property (IP) licenses and design verification to transfer their designs to wafer fabricators, who use raw silicon, photomasks, and machinery to produce packaged chips that are assembled with a printed circuit board or PCB substrates and shipped to end users. In fact, a chip’s components may travel over 25,000 miles before they are integrated into a television, mobile phone, car, computer, or any one of the millions of other items that rely on semiconductors to function today.

SIA expects semiconductor companies to recover with a 4.7-5% CAGR through 2027. By the end of 2027, semiconductor businesses will reach a market share of 726.73 billion USD, which is a significant amount. The most recent revenue results were taken into consideration to show you the top 10 ranked semiconductor production businesses worldwide. You may use this to estimate the size of each of these businesses in terms of investment and production. The 10 largest semiconductor manufacturers for 2022 are listed below:

US share is shrinking in the overall pie.

The percentage of US semiconductor manufacturing capability decreased by more than 10% over the past eight years as a result of the aggressive chip manufacturing incentives provided by other governments and increasing industry mergers resulting in US semiconductor industry growth faltering. US share fell from 57% during 2013 to 43% in 2022. The semiconductor market has seen ups and downs since 2022. There have been clear indications of a slowdown in the business since 2021 when demand reached record levels across the board. The surge in expenditure on consumer devices and infrastructure components has slowed as the popularity of stay-at-home and work-from-home trends has waned. The industry may, however, be emerging from its previous sluggishness at this time. This is due to the CHIPS and Science Act (worth  $280 billion), which had been passed by Congress in July and included $52 billion in subsidies for domestic manufacturing facilities. 

Major end users of the semiconductor chips – Auto and Technology

Consumer goods like laptops and smartphones, which are ultimately bought by consumers, drive the vast bulk of semiconductor demand. Consumer demand is being pushed more and more by developing nations, such as those in Eastern Europe, Asia, Latin America, and Africa.

Complex value Chain: Dependency on multiple locations

The semiconductor industry is not evenly distributed and is dominated by a few countries, mainly the U.S., Taiwan, South Korea, Japan, China, and Europe. There is no single region with the entire production stack in its territory.  As per SIA, 57% of the semiconductor materials, 56% of wafer fabrications, and 70% of the memory come from Asian countries. The U.S. leads the way in electronic design automation (EDA), logic, equipment, discrete and analog. This deep interdependence makes it difficult for any single country to maintain leadership in the entire value chain globally.

Capital-intensive business and lack of R&D funding

Making semiconductors can be complex and comes with huge costs. The foundries and OSAT companies will likely face increased capital expenditure pressure as they continue to expand production to address the rising chip demand. Setting up a new foundry can cost around $15bn-$20bn and require extensive manufacturing know-how and robust infrastructure. The back-end assembly, packaging, and testing facilities can run between $5bn to $7bn. Additionally, firms invest a significant portion of their revenue on capital expenditures and R&D. As per the SIA report, the world collectively needs to invest $3 trillion in R&D over the next decade to keep pace with the growing demand. The total R&D spend throughout the industry amounted to $71.4 billion in 2021. Samsung, TSMC, and Intel are among the largest investors in the chip. 

US-China Tech War

The conflict between the US and China now is quickly transitioning to a tech war after the trade war started during Donald Trump’s presidency. Although US Speaker of the House Nancy Pelosi’s much-publicized trip to Taiwan lasted less than 24 hours, she still found time to see Mark Liu, chairman of Taiwan Semiconductor Manufacturing Co., the largest chip manufacturer in the world. The meeting was a part of Washington’s ongoing efforts to work with TSMC to develop a semiconductor foundry in the United States. Semiconductors play a crucial role in everything from phones and high-tech military weapons to medical equipment and space stations in today’s 5G communication environment.

TSMC, which also supplies the most cutting-edge microchips to businesses like Apple, Qualcomm, and Nvidia, currently accounts for 54% of global demand, with Taiwan currently holding about 64% of the market for semiconductors worldwide. The only two businesses capable of producing the most sophisticated 5-nanometer semiconductors are TSMC and Samsung of South Korea. Washington worries that Taiwan’s reunification could be the worst-case scenario for US national security since it would mean Beijing had direct or indirect control over crucial global semiconductor supply lines, thus leaving the US severely vulnerable.

Implications for US Auto Stocks or US EV Stocks

The current US EV stocks implications are such that, only 10% of semiconductor fabrication facilities are employed to make automotive components, but as the market for electric vehicles grows, this percentage may rise (EVs). Due to the intricate power electronics required for EVs, EVs have three times higher semiconductor content than conventional combustion engines. Consequently, the EV market offers semiconductor businesses a tremendous window of opportunity for expansion.

A passenger vehicle with self-driving capabilities with its own batteries may be introduced by Apple by 2024, according to reports concerning the company’s planned foray into the auto business. Big Tech’s focus on the automotive industry would be disruptive for current automakers, but it also emphasizes the enormous market opportunity in emerging mobility applications. All of this is encouraging for businesses that produce chips necessary for EVs and smart transportation, such as power semiconductors. To put it in perspective, the electric Mach-e needs about 3,000 semiconductor chips, compared to about 300 for a Ford Focus. To put it in simpler words, the demand from EV manufacturers for chips has grown higher. The prices of EV equities like Tesla temporarily adjust as a result of these macroeconomic occurrences. As an Investor, you must look at the possibility of investing in Tesla.

Several automakers, notably Volkswagen and Ford, have had to suspend production in recent months due to a global scarcity of semiconductor chips, which has hampered their attempts to recover from weak demand as a result of COVID-19 lockdowns. The auto industry’s increasing reliance on semiconductors and the ramifications for both industries have come under focus as a result of the crisis. 

Global chip shortage to boost the semiconductor industry performance 

A global semiconductor shortage and increased demand for microchips are likely to boost the cash flows from operations for foundries and outsourced assembly and testing (OSAT) companies. Foundries like TSMC and Samsung are likely to be the key beneficiaries of the robust chip demand as they will enjoy strong pricing power. TSMC with its market share of over 50% in the foundry industry is likely to see revenue growth of 10-15% in 2020-25.  Additionally, the revenue growth for the OSAT companies is likely to see substantial growth as higher chip demand will boost the need for assembly and testing services (Exhibit 6). The chip shortage could also lead to a cyclical uptrend for larger IDMs and fabless companies like Intel (INTC), Texas Instrument (TXN), Nvidia (NVDA), and Advanced Micro Devices (AMD). 

Response from US EV stocks \ US auto Stocks

Tesla: The pandemic is partially to blame for the ongoing semiconductor scarcity, which has led to the closure of numerous ports, factories, and industries and worsened labor shortages brought on by rising electronic demand and work-from-home policies. The rising demand for mobile phones and electronic chips, which is exclusive to the electric vehicle industry, compelled manufacturers to concentrate their constrained semiconductor supplies on models with a greater profit margin, including cell phones. The ongoing shortage has been made worse by the dearth of microchip producers; TMSC and Samsung, both situated in Asia, control more than 80% of the market. This increases the lead time for a semiconductor and overtly concentrates the market.

Companies that produce electric vehicles have been forced to make critical adjustments or shut down as a consequence of the ongoing scarcity. To fulfill its fourth-quarter sales targets, Tesla decided in February 2022 to eliminate one of the existing two electronic controls that were incorporated in the steering racks of the Model 3 and Model Y vehicles. Tens of thousands of automobiles owned by consumers in Australia, China, Germany, the United Kingdom, and other countries in Europe have already been impacted by this decision, which was made in response to the shortfall. As the part is redundant and not required for the level 2 driver-assistance capability, Tesla chose not to inform customers of its removal.

Ford: Ford announced the immediate stoppage or modification of output at four of its North American processing facilities in February 2022 as a result of the microprocessor shortage. At factories in Missouri, Illinois, Michigan, and Mexico, this has an impact on the manufacture of the Explorer SUVs and Ford Bronco, the Ford F-150 and Ranger pickup trucks, the Ford Mustang Mach-E electric crossover, and the Lincoln Aviator SUV. Ford is upbeat despite the closure. According to Ford executives, global manufacturing volumes would rise 10% to 15% overall in 2022. Jim Farley, the CEO, also indicated in the company’s 2022 yearly report that Ford intends to increase its capacity for producing electric vehicles by 2023 with the goal of having at least 40% of its goods powered by electricity by that time.

The semiconductor scarcity will continue to have an impact on the electric vehicle sector regardless of the causes or results. There has been a stronger drive to build more semiconductor manufacturing in the United States as a result of the distribution chain and geographic challenges that account for a significant portion of the shortage.

Conclusion

To conclude, the US semiconductor industry growth is expected to be significant in 2022 and beyond, post its recovery from a cyclical downturn. Technology inflections such as 5G wireless, artificial intelligence, Internet of Things, cloud computing,  machine learning and  Electric Vehicle demand are driving up the long-term demand for the chip industry. Increased government funding and incentives remain key for the rampant US semiconductor industry growth.