Semiconductors, a niche and stellar growth business

The market size for semiconductors, those essential small components in the automotive, computer and data storage industries, is growing steadily. Experts estimate that the sector will exceed 1 trillion dollars by 2030. The investment is in Asia.

Cars, computers, smartphones, appliances.. all these products that we use every day require chips or semiconductors in order to operate. In a world that is becoming increasingly connected, and that is steadily moving towards an almost total digitalisation, the industry responsible for the creation of these indispensable components has been in the spotlight in recent years. Both because of the expected high growth and investment opportunities, but also due to certain intrinsic challenges. Therefore, it is necessary to analyse the semiconductor industry in detail.

In 2021, according to the consulting company McKinsey, chip sales reached 600 billion dollars. However, the same analysts expect growth to remain high, between 6 and 8 % per year, which would translate into sales worth one trillion dollars by the end of the decade. Similarly, Statista forecasts the size of the market at $750 billion by 2025 and $1.1 trillion by 2030. In other words, the size of this market would more than double in just ten years.

Of course, these figures would be reflected in the companies and their stock market valuations, according to McKinsey. “Assuming an EBITDA of 25-30%, current stock valuations support average revenue growth of 6-10% through 2030 across the industry, according to our study of 48 listed companies,” they note. 

With these figures outlined, the potential for growth in the sector over the next few years is clear. However, not all companies are equally well positioned, nor do all the sub-sectors involved show the same strength.

The fastest growing sectors

An estimated 70 % of the total growth in the sector is expected to be driven by three main areas: automotive, IT and data storage. Thus, servers and data centers would grow from a 100 billion market in 2022 to more than 249 billion in 2030. While automotive sales would grow from 63 billion to 149 billion by the end of the decade.

Indeed, emerging trends such as electric and autonomous mobility are likely to boost demand threefold, with the cost of semiconductors in a Society of Automotive Engineers (SAE) Level 4 automobile with an electric powertrain expected to reach $4,000 by 2030, compared to $500 for an SAE Level 1 automobile with an internal combustion engine.

The risks: atomisation and delay

Nevertheless, the risks of the sector cannot be overlooked. The profit margins of these companies are generally low, and companies must operate continuously (24 hours a day, 7 days a week) to amortise their investment. In addition, maintaining a competitive yield (percentage of operating chips per batch) of 80-90 % requires years of experience. It is also a lengthy process, taking up to 26 weeks to manufacture a chip for a consumer.

The industry is currently highly fragmented and dependent on the big giant, TSMC, which has 54% of the market, a supplier to Apple and Nvidia. Perhaps for this reason, many companies have begun to announce major investment plans to develop chips. Intel and Micron have approved $20 billion for the creation of factories in the US, while China – at the public level – is drawing up a $143 billion support package to boost the industry.

Queens of the chip market

When looking at the key players in the industry who stand to benefit from this growth, it is necessary to look to Asia. This continent accounts for 90 % of manufacturing, with TSMC occupying 56 % of the market share. The second largest giant is Korea’s Samsung with 16 % and third place goes to the Taiwanese company UMC with 7 %. The first American company in the ranking is Global Foundries, which manufactures 6 % of the world’s chips. Thus, Taiwan alone accounts for 66 %.

However, the semiconductor market is also dominated by other names of particular relevance, such as Nvidia and ASML. Nvidia has enjoyed a meteoric rise on the stock market in the last year as a result of the design of chips for artificial intelligence, a market that alone could reach more than 230 billion by 2030. The European company ASML, meanwhile, does not make chips, but it plays a key role in providing players such as TSMC and Samsung with the tools they need to make their products.

The importance of understanding the supply chain

The semiconductor industry is not just about the producers. Instead, we have to understand that it is an industry in which design, assembly and manufacturing are equally fundamental. TSMC or Samsung produce chips, Nvidia designs them, ASML manufactures the tools needed to produce the chips… therefore, in this industry it is essential to understand the role of each company and how you can take advantage of this opportunity.

Semiconductor sales worldwide from 2012 to 2024, by month

Source: Statista