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Chips with absolutely everything

Share prices of major semiconductor companies have been doing extremely well in 2024 so far, as the digital revolution moves up a gear.

| 6 min read

The market has been reconsidering the prospects for semiconductors. The price of Nvidia had soared with strong support for Taiwan Semiconductor Manufacturing Co (TSMC), the maker of the chips Nvidia uses. This demonstrates enthusiasm for the parts of the industry that fuel Artificial Intelligence (AI).

In 2022-23 the semiconductor industry went through one of its periodic contractions as destocking hit. There had been over ordering and excessive inventory when slower demand resulted from the end of the lockdown surge. As economies slowed and peak demand for all things digital passed, so the stock cycle swung against the manufacturers.

Underlying growth very strong

The last half century has seen a colossal growth in demand for computing capacity. The world has been transformed from one where only big companies could afford large computers to carry out business management tasks. We now live in a world where most families and individuals have access to plenty of computing power on their phones, through their laptops and pads, and via a wide range of consumer electronic products. Everything from the car to defence equipment, from gaming to medical services has come to need a wide range of computer chips to control, process, memorise and communicate data.

The semiconductor market exceeds $500bn of turnover and should expand a bit this year after the decline following the end of lockdowns. There was a big surge in demand over lockdowns when many people and businesses needed additional smartphones, home computers and smarter devices to handle remote working, downloaded entertainment, online shopping and the rest to get through being at home. There is still good underlying demand for much of this, enhanced by business demand for AI enhancements to systems. Electric cars have given a boost to chip demand for autos, whilst defence and government systems have also required many more computer controls.

The business and investing opportunities often rest with the companies that develop the most exciting growth products that use the extra chips. The chip market is subject to strong competition and downward pressure on costs of processing capacity, along with swings from shortage to excess. It offers best opportunities amongst the limited number of companies that are at the cutting edge of new faster more powerful chips on ever smaller amounts of silicon per unit of processing. The pioneering companies that produce the better faster chip have more scope to charge a high margin. The complex chips themselves may be large as they add so much extra processing power.

Types of chip

Chips are assessed by the degree of their density of capability, where ever-smaller per unit of output means less power used and greater speed. This is thought better and more valuable to the users. TSMC and Samsung have developed 3 nanometre chips, where chips under 7 nanometres are said to be advanced. They are planning to go to 2 nanometres, with tiny gates and transistors on the chip. There are logic chips for processing, Memory chips for storing, application specific integrated chips and systems on a chip. Chips can be digital or analogue. The larger scale chips for the more mundane uses can become commodities where the margins are lower and pricing keener. The rise and rise of Nvidia has led to growing interest again in chip design and production.

Nvidia designs the most sophisticated chips for AI and has got ahead of competitors.

This has led to an explosion of demand for its products. TSMC is an important supplier to Nvidia. Nvidia produces Graphical Processing Units which have great processing power to meet the complex requirements of the rapid and wide-ranging search and computer learning that AI requires. The world is already storing colossal amounts of data and adding to it at a big pace every day. AI requires an ability to access large amounts of that data and process it to handle individual queries and achieve human-like responses to questions.

Nvidia sells the A100 and the H100 and is launching the Blackwell GPU aimed especially at data centres. They are looking for more processing power with less use of energy. The stock market thinks Nvidia will be a very strong presence in this market and will be able to charge good prices against a background of a big order backlog.

New capacity for future demand

The world will need extra capacity to handle the growth in overall demand. It will also need more capacity for advanced chips and relatively less for the older products. The US has been banning sales of advanced products into China, so China is putting in a lot of extra capacity. Meanwhile, the US CHIPS and Science Act is also enticing semiconductor manufacturers to put more fabrication into the US.

TSMC is putting four new plants into Taiwan and one into each of Arizona, Japan and Germany. Samsung is putting a new plant into Texas. Intel is expanding in the US and EU, with two new plants in Arizona and Ohio. Micron is expanding in New York and Idaho. It takes a long time to install and get up and running. In due course the extra capacity may hit world prices of some chips, but less so for the most advanced where there is less competition.

World demand will remain on a gently upward trend overall, with the occasional break like 2023 when there is temporary excess stock. Demand for the more advanced chips is going to increase at a faster rate as we are witnessing this year for AI-enabled product. This is a growth sector with some cyclical pattern. Over the longer term it is a strong uptrend. More and more features of life require chips to help people lead their lives through their smartphones and electronic devices.

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Chips with absolutely everything

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