Markets & Research
Semiconductors could be the new oil: Here’s why

Just as fossil fuels helped the Industrial Revolution flower, semiconductors are pushing the digital age into overdrive.

It’s difficult to overstate the importance of the humble semiconductor. The tiny contraptions are the bedrock of modern electronic applications, powering every digital device in your home, car and pocket. And with the Internet of Things roping in traditionally analog items, that pervasiveness is set to expand.

Consumers aren’t the only ones snapping up electronics. Corporations, governments and industries are transitioning to 5G technologies, artificial intelligence and cloud-based solutions. That could help position the semiconductor industry to benefit from powerful tailwinds in the years ahead, says Mathews Cherian, a Capital Group equity portfolio manager.

“I see semiconductors powering the next decade of global growth in an increasingly data-hungry world, much like oil fueled the rise of industrial economies in the last century,” he adds.

Of course, the path forward won’t always be smooth. Today’s global shortage of semiconductors, partly driven by an explosion of pent-up post-pandemic demand, has caused all manner of supply complications. Even large and savvy companies have suffered. Apple was forced to delay its iPhone 12 last year, and Sony and Microsoft have been unable to produce enough of their latest game consoles. Vehicle price surges are also related — many automakers simply didn’t have a sufficient store of electronic parts when demand for cars erupted this year.

This dependence is only going to intensify going forward, says Steve Watson, an equity portfolio manager at Capital Group Private Client Services. For example, “as vehicles become autonomous, they will require even more advanced components to make them safe and efficient,” he says. “I expect chipmakers will be working overtime to satisfy the robust demand for semis across industries.”

Today’s semiconductor shortage is due more to the pandemic than to any structural issue.

As any car shopper today can tell you, the implications of semiconductor manufacturing and delivery aren’t confined to boardrooms and factory floors — the shortage in components has had a tangible effect on car prices and availability. Automobile prices spiked this year as pandemic-weary consumers began reentering the world, many eager to find new rides for their old commutes.

Similarly, travelers needed to rent cars, prompting rental agencies to reconstitute fleets that they’d trimmed during the thin year of the pandemic. This wave of demand crashed on the rocks of a flat-footed auto industry that had largely cut back on semiconductor purchases. Many automakers had to put in new purchase orders to jump-start their plants, placing them at the back of a monthslong line for microchips and other electronic components.

But it wasn’t just cost-conscious automotive companies behind the semiconductor crunch. The pandemic caused the world to go virtual, accelerating everything digital, says Shailesh Jaitly, an equity analyst who covers global semiconductor manufacturing. This shift increased orders for the chips used in personal computers, video game devices, home appliances and cloud-based applications. As a result, there’s simply no capacity for new chip orders right now.

Semiconductor market size worldwide, by application (billion US$)

This chart shows the size of various semiconductor markets in 2019 and size projections in 2024. Smartphone market size was $106 billion in 2019 and projected to be $155 billion in 2024. Personal computing and consumer electronics market size was $128 billion in 2019 and projected to be $160 billion in 2024. Automotive market size was $41 billion in 2019 and projected to be $65 billion in 2024. Industrial electronics market size was $49 billion in 2019 and projected to be $71 billion in 2024. Communication infrastructure, data storage and servers market size was $95 billion in 2019 and projected to be $147 billion in 2024. Source: Statista. As of February 2021.
Source: Statista. As of February 2021.

Fortunately, Jaitly explains, the auto chip shortage is likely to correct itself by the end of the year because it will take about four months to manufacture the semiconductors. 

Critically, however, these shortages aren’t like the industry’s past boom-and-bust cycles. Cherian says semiconductor manufacturers are more disciplined and better positioned today, following years of consolidation that resulted in a few dominant players in each specialized area of the global supply chain.

On the whole, manufacturers have gotten better at moderating capital expenditures, managing inventory and practicing price discipline. By various estimates, global semiconductor sales could double from about $450 billion in 2019 to nearly $1 trillion by 2030, indicating the maturity of the industry and its ability to continue to meet demand, Cherian notes.

A data glut could drive semiconductor demand for decades.

An increasing amount of data is being created every day. It was once primarily driven by people as they used social media and posted pictures of their children, restaurant meals and places they had visited. But by 2018, machines had surpassed humans as the largest data creators, Jaitly says.

“This transformative shift will be a significant catalyst for the semiconductor industry,” he explains. “Machines require processing power and energy, so the challenge will be in increasing processing capacity and lowering energy consumption.”

Because much of that data is stored off-site, data centers are getting a lot of attention. Today, they account for roughly 3% of global electricity consumption, but they could account for 25% in a decade if they’re not made more efficient. That barrier to scalability has created an urgency to reduce semiconductor power consumption by 30% every two years. The need for constant iteration could be a significant tailwind for the industry.

And, of course, data must come from somewhere. 

Watson says: “Semiconductors will monitor many more aspects of our daily lives. Most of this will be through products we already have — phones and tablets, automobiles, entertainment systems and appliances. Wearables are becoming more sophisticated and will help us track our workouts, sleep and overall health. These devices will feel familiar, but we’ll be able to use them in ways we never could before.”

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