“In the age of AI, it’s often said that data is the new oil. Yet the real limitation we face isn’t the availability of data but of processing power.” Chris Miller
The semiconductor industry is the backbone of technological advancement, and it’s the very foundation upon which our digital world is built.
Access to semiconductors is becoming crucial for countries striving to stay competitive.
As technology evolves, semiconductors become ever more critical, driving the processing power necessary for everything from your smartphone to your car’s navigation system.
For nations seeking to stay competitive in the global arena access to these vital components is now more important than ever.
The battle for tech supremacy between the US and China, often referred to as the Thucydides Trap, hinges on computing power. The nation that gains the upper hand in artificial intelligence will likely dominate this technological race and lead future innovation.
Throughout history, from the agricultural revolution to today’s digital age, human progress has been driven by groundbreaking innovations.
Today, China spends more on chips than oil, recognising its vulnerability due to reliance on foreign chipmakers.
China is tackling this by investing billions in subsidies to bolster its domestic chip industry. In 2023, China imported $349.4 billion of chips, surpassing Saudi Arabia’s $310.6 billion in crude oil exports.
Much like how railroads powered the 19th century, today’s tech giants—Google, Nvidia, Microsoft, and Amazon—hold immense market power. The rise of artificial intelligence is expected to generate an insatiable demand for data, electricity, processing power and technology.
Our YFS Intelligent Wealth Fund strategically invests in seven key future themes, all of which heavily rely on critical chips that power our digital lives. These seven themes listed below represent sectors with high growth potential driven by demographic shifts, digital disruption, and environmental sustainability.
Understanding the Semiconductor Industry
Let me introduce you to the main categories within the semiconductor industry:
- Fabless firms: Design but don’t manufacture.
- Foundries: These companies specialise in manufacturing chips designed by other firms.
- Integrated Device Manufacturer (IDM): Both design and manufacture chips.
- Electronic Design Automation (EDA): Use specialised software for chip design.
- Wafer Fab Equipment (WFE): Provide machines that transform designs into physical chips.
- Specialised Materials and Chemicals: Supply essential materials like silicon wafers, gases, and fluids which are important for fabricating chips.
- Assembly and Test: Final stage for testing and packaging chips.
Here is a great explanation of the semiconductor ecosystem by Dr. Steve Blank.
Most Western companies are fabless, focussing on design while manufacturing is done in Taiwan by Taiwan Semiconductor (TSMC) and in South Korea by Samsung.
Taiwan, particularly TSMC, holds strategic importance in the chip industry. For instance, Apple’s iPhone chips are made by TSMC and assembled by Foxconn.
Complex or leading-edge chips are mostly designed by Western companies such as Nvidia, Arm and AMD.
As tensions rise, especially between the US and China, the vulnerability of the supply chain becomes more apparent.
Chris Miller in his book “Chip War,” highlights, “The world’s chip industry, as well as the assembly of all the electronic goods chips enable, depends more on the Taiwan Strait and the South China coast than on any other chunk of the world’s territory except Silicon Valley.”
Japan leads in providing materials for the semiconductor industry.
In the graphic processor unit (GPU) market, Nvidia dominates, followed by AMD and Intel.
For memory chips, Samsung, SK Hynix, and Micron Technology are key players.
The analogue chip market is led by Texas Instruments and Analog Devices Incorporated (ADI).
Manufacturing semiconductor equipment is dominated by a few companies, ASML, Applied Materials, Tokyo Electron, Lam Research and KLA Corporation.
The YFS Intelligent Wealth fund is invested in KLA Corporation, Micron Technology, Nova Ltd. and Alphawave IP. The fund also held Nvida previously before we sold it due to the high valuation. We are also considering ASML, as it plays a monopoly role in manufacturing lithography machines that produce semiconductors.
It is also becoming increasingly common for major technology companies such as Apple, Amazon, Microsoft and Alphabet to develop their own chips.
The significant investment and rare expertise that are required in the industry create high barriers to entry. While new entrants face challenges, countries like China are heavily subsidising their semiconductor industries to gain a competitive edge.
Semiconductor companies play a vital role in transitioning the world from physical to digital, advancing living standards, and driving economic growth. For instance, a modern car contains between 1,000 to 3,000 semiconductor chips, underscoring their pervasive importance.
Source: Polar Semiconductors
As technology continues to evolve and become more complex, the demand for semiconductors will only increase, powering advancements in autonomous vehicles, artificial intelligence and beyond. Semiconductors truly are the backbone of modern technology. By investing in the YFS Intelligent Wealth Fund, you are tapping into the immense potential of high-growth sectors driven by technological innovation and sustainability.
Awet Ghirmay, Head of Investment Research
If you want to learn more about this topic, please find the link here.
More information about our fund can be found here: Hargreaves Lansdown or AJ Bell
Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
