Semiconductors about to replace the oil

Semiconductors are the new black – about to replace oil as the fuel of the world economy. The race to build future production capacity is in full swing, with Taiwan as the mainstay and high geopolitical efforts.

An acute shortage of so-called semiconductors has become a mantra during the spring. Especially in the automotive industry. It’s about difficulties in producing enough of the tiny and technically complicated small chips that will digitize and automate everything from cars to toasters.

The bursting order books in the semiconductor industry are increasing efforts in an already red-hot geopolitical fight for industrial power – with the United States and China in the ring corners.

– Taiwan is the new Saudi Arabia, says Geraldine Sundström, portfolio manager and expert in the semiconductor industry at the American fund giant Pimco.

Greater geopolitical tensions

And just as the Saudis have done as an oil giant since the 1970s, the Taiwanese will in future – in Sundström’s scenario – play a key role when the economic powers clash.

– There is already a tense situation around the South China Sea and this will be an area with even greater geopolitical tensions in the future, she says.

She sees semiconductors as the oil of the new age – with one crucial difference:

– You can basically not store semiconductors. Oil 20 years ago and oil today are the same thing. But semiconductors are designed for special purposes. They often become obsolete in a few years. This makes it much more complicated to secure the supply.

This property builds huge barriers around the sector. It takes capital investments of perhaps hundreds of billions of kronor, long partnerships with large industrial customers, political support and successful research and development for many years to start a competitive semiconductor factory.

The United States’ share of global semiconductor manufacturing has plummeted from 37 to 12 percent since 1990 – despite Asian giants such as Taiwanese TSMC and South Korean Samsung already having factories in the country.

President Joe Biden wants to reverse the trend with a $ 50 billion investment to build more production in the country, and there is a lot of buzz about the fact that American Intel must move its positions forward at home.

In Europe, the exclusion of the semiconductor industry over the past 30 years looks even more brutal. Swiss ST Microelectronics, German Infineon and Dutch NXP Semiconductors and ASML are certainly heavy players in the sector. But their production is spread all over the world.

– The simple explanation for this is that we have been outcompeted by better and cheaper products from other countries, says Mats Kinnwall, who follows the development as chief economist for the industry association Teknikföretagen.

“In the lap of China”

EU Industry Commissioner Thierry Breton recently got 22 member states to sign a letter of intent stating that the EU will double its semiconductor production in ten years to 20% of global supply.

– You are afraid of ending up in the lap of China, says Kinnwall.

– There could be arguments for European production if you are afraid of ending up in a blackmail situation, he adds.

But from an economic perspective, Kinnwall does not do much for the EU strategy.

– I am not a proponent of large state-controlled investments where politicians and bureaucrats point out where the growth industries of the future are. I think the market is better placed to handle it, basically.

Despite all the disruption in the wake of the covid-19 pandemic, sales of semiconductors grew by 6.8 percent to the equivalent of SEK 3,650 billion last year, according to the trade association WSTS. Growth is expected to increase to 10.9 percent this year.

Exacerbated semiconductor failure

But logistics and production problems are widespread. On top of the effects of shutdowns and stockpiling during the pandemic, a blow came in February in the form of extreme winter cold in Texas. This hit hard on Samsung, Infineon’s and NXP’s semiconductor factories in the US state.

Shortly afterwards, a major fire paralyzed large parts of production at Renesa’s Electronics semiconductor factory outside Tokyo – directly aimed at car manufacturing.

Virtually all vehicle manufacturers – including the Swedish ones – now report more or less serious production disruptions due to semiconductor shortages. In the United States alone, there is talk of a production loss of 300,000 vehicles and tens of thousands of lost jobs – and the situation looks set to worsen in the second quarter.

The problem also exists in part in other sectors – such as telecom, electronics, white goods and energy – and the price situation for both semiconductors and the products they are used in is being pushed upwards.

– It can be a fairly long period before you get a balance between supply and demand for these things, says Kinnwall.

“The change is structural”

The stable tip is that the most acute deficiency can at best be remedied in a few months or six months. But in fact, it has only just begun, according to Sundström.

Of course, part of the shortcoming will be remedied. But we are facing 5-10 years with a very limited range of semiconductors, she says.

The imbalance that worries her is not about production and delivery problems but about a sharp increase in demand. Growth will be in double digits over the next five years, according to Sundström:

– I think it will grow in trend further than that, when we take into account the development of self-driving vehicles, electric cars, robotics, automation, artificial intelligence, smart cities, renewable energy. It can go on for decades.

– This is not an episode of semiconductor failure, caused by everyone who worked at home in the pandemic or so. The change in demand goes much deeper than that, the change is structural.

Digitization is driving development

New 5G networks, electric cars, artificial intelligence, automation and robotisation of industries and transport systems, smart cities, green energy and an ever-increasing consumption of connected electronics and computerized white goods – we are heading into an increasingly digital world where so-called semiconductors plays an increasingly important role as an input in production.

The word semiconductor – “semiconductor” in English – derives from the fact that the material does not conduct current as well as a metal conductor but also does not completely insulate. The raw material can be, for example, silicon, germanium, selenium, which are designed and doped to get the right properties.

The very first semiconductors were manufactured in the 19th century, but they did not have an industrial impact until the end of the 1940s in connection with the transistor radio. Today, they are often thinner than hairs and linked on so-called chips with myriads of wires and connectors, which in turn are used to control processes in everything from computers, mobiles and cars or medical equipment, weapons, energy systems and appliances.

Asia has taken over

In 30 years – from 1990 to 2000 – the semiconductor industry has grown from sales of just over 50 billion dollars per year to over 440 billion dollars, according to statistics from the trade association WSTS.

At the same time, consolidation and specialization have during the period increasingly concentrated the industry into four large clusters of raw material manufacturers, tool manufacturers, design companies and factories – in Taiwan, China, South Korea and Japan.

In 1990, Japan dominated the sector, while the rest of Asia had to settle for a 14% market share. By 2000, the semiconductor market had quadrupled in ten years, and both Asia and the United States had overtaken Japan as the largest region. Asia’s share was then 25 percent.

Ten years later – in 2010 – the semiconductor market had grown by another 50 percent. In principle, all growth during the decade ended up in Asia, whose market share swelled to almost 54 percent.

By 2020, the global semiconductor market had grown by another 50 percent. Then the market shares looked like this:

Asia Pacific (excluding Japan): 61.5 percent

America: 21.7 percent

Europe: 8.5 percent

Japan: 8.3 percent

Source: Deloitte, Pimco, WSTS


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