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Revenge. Historically battered by Intel for microprocessors and by Nvidia for graphics processors, AMD finally turned a profit in 2017 after six consecutive years in the red. Since then, everything has been going smoothly for the US company, whose clients include all the big names in the electronics industry (Amazon, Google, Microsoft), as well as the general public with its graphics cards (GPU) and processors (CPU) for PCs. AMD also equips the next generation of consoles, including the Sony PlayStation 5 and Microsoft’s Xbox Series X, which is expected to be on the market by the end-of-year holidays. Its Radeon graphics cards are also used in Apple’s Mac Pro computers.
AMD remains in good shape because the California firm is gaining more and more market share from its rivals as a result of its more powerful products (see the November 2019 edition of Swissquote Magazine). In August 2019 for example, AMD launched the second generation of its Epyc processors for data centres, which are based on 7 nm process technology, whereas competing products from Intel will only move to 10 nm chips in 2020. As a result, AMD was able to sell its Epyc processors to the Microsoft and Amazon Web Services data centres.
To deliver such performance, AMD relies heavily on its partnership with TSMC. While Intel manufactures its own products, AMD is happy to simply develop its products as a fabless company. Production is handled by two manufacturers: US company GlobalFoundries for chips exceeding 7 nm and Taiwanese group TSMC for more powerful products. As a very important client for TSMC, AMD has access to the manufacturer’s latest innovations. The California company is expected to be one of the first in the world to benefit from the 5 nm etching in 2021, right after Apple and its A14 Bionic chip that will be used in the iPhone 12 model expected in late 2020.
Advanced Micro-Fabrication Equipment (AMEC) is one of the only Chinese manufacturers able to build machines that are used by foundries to produce chips. Sold in the rest of Asia and Europe, these machines can be used to produce the newest generation of chips.
As the largest global purchaser of chips in 2019 ahead of Samsung, with $36.1 billion in purchases according to figures from Gartner, Apple has a life-or-death impact on some of its suppliers. And that’s not ideal for these suppliers: Apple doesn’t hide its ambitions to increasingly internalise the design of its electronic components. Several of its suppliers, including Intel, Qualcomm, Skyworks and STMicroelectronics, have reason to be concerned.
With $14.61 billion in revenue in 2019, Applied Materials is the leader of the global market for manufacturers that supply machines to chip foundries (TSMC, Intel, Samsung, GlobalFoundries), ahead of Dutch group ASML. But the two leaders aren’t direct competitors. While Applied Materials dominates the market for metal deposition and etching equipment, ASML is the global leader for photolithography machines.
Size is important. To increase the number of components on each processor and therefore increase power, the semiconductor industry has begun miniaturising. In this race, Dutch company ASML, which for years has produced machines used by all the manufacturers (Intel, Samsung, TSMC), has just taken a huge leap forward by developing a lithography process that uses extreme ultraviolet rays (EUV).
In other words, the semiconductor industry is using rays of light to etch circuits that are printed on silicon wafers – a process called lithography. With its EUV process, which began large-scale production in 2019, ASML was able to significantly reduce the wavelength of the ray, or the fineness of the line, therefore progressing from ultraviolet to extreme ultraviolet.
Taiwanese manufacturer TSMC’s ability to launch 5-nanometre chips in 2020 – for comparison, a single hair is between 50,000 and 100,000-nm wide – is in part thanks to EUV machines. But ASML didn’t need EUV technology to stand out. The company has an 85% market share with its less advanced lithography machines and already supplies these machines to all of the large chip makers. And ASML claims it is the only company on the market with an EUV process.
“ASML is quite simply the most important company in the world and no one knows about it,” effused Julien Leegenhoek, tech stock analyst at Union Bancaire Privée. “If ASML stops, the world will stop. There will be no more chips.” Hugo Paternoster, an analyst that specialises in semiconductors at AlphaValue, agrees: “ASML is a company that really shouldn’t be overlooked. It already has a virtual monopoly on the classic lithography market, and every manufacturer on the planet, if it doesn’t want to fall behind, will need to buy EUV machines.” But these giants – four metres high and eight metres long, weighing 180,000 kilos – don’t come cheap: €120 million per unit.
Manufacturers, however, aren’t put off by the investment, even during a time of crisis: “The demand outlook is currently unchanged,” said the CEO of ASML Peter Wennink on 15 April. In Q1 2020, ASML generated a 9.2% increase over one year in revenue, reaching €2.44 billion, with a gross margin of 45%.
Well-known in the semiconductor market, Broadcom (of which 85% of its chips are produced by Taiwanese giant TSMC), is becoming increasingly interested in software. In August 2019, the US company announced that it acquired Symantec, which sells the famous anti-virus software Norton, for $10.7 billion. One year earlier, Broadcom also acquired CA Technologies, a US business software company, for $18.9 billion.
The Beijing-based firm has entered into a partnership with start-up ChangXin Memory Technologies to produce DRAM memory cards that are used to store data. By late 2020, the two partners plan to produce 40,000 cards per month, which is 3% of the global total. This should cut into sales of South Korean companies Samsung and SK Hynix, as well as US group Micron.
Infineon chose a bad time to make the largest acquisition in its history. On 16 April, the German manufacturer (which etches its own chips) announced in the middle of a pandemic that it would acquire US-based Cypress for €9 billion. With this transaction, the Munich industrial company (the result of Siemens selling off its microprocessor business in 1999), has become the largest supplier of automotive chips in the world, ahead of Dutch group NXP and Japanese company Renesas, according to IHS Markit.
On paper, the portfolios of the two companies seem very complementary in terms of the automotive sector: Infineon is an expert in powerful electronic components, which regulate the energy consumption of industrial machines and cars. For instance, the company supplies chips that control the battery of the Tesla Model 3. While Cypress is known for its Wi-Fi and Bluetooth components that are used in Nintendo’s Switch console, as well as infotainment systems in models from Audi, BMW, Mercedes-Benz, Porsche and Tesla.
“Infineon is well-positioned to benefit from the promising automotive sector, which is progressively interested in electronic chips as a result of the increased automation of vehicles and electric motors,” said Hugo Paternoster, an analyst specialising in semiconductors at AlphaValue. But the current context is hurting the German company, as the car industry is among the major victims of the COVID-19 crisis. Ratings agency Moody’s predicts that this market will decline in 2020 by 21% in Europe, 15% in the United States and 10% in China. This will seriously impact Infineon’s profits, as the company made nearly 45% of its revenue from the automotive industry before the merger.
And the king reclaims its crown. US giant Intel, which reigned over the chip market from 1992 to 2016, returned to its number one spot atop the semiconductor market in 2019 ahead of Samsung. However, all is not well. In a letter dated 31 March addressed to employees, Intel CEO Bob Swan expressed his disappointment: “We need to ensure that we exceed our customers’ expectations and deliver what they need when they need it. Sometimes we failed to do that last year, and that was unacceptable.”
With $72 billion in revenue in 2019, up 1.7% over one year, Intel is still doing well. But is seems that the US champion is becoming increasingly outdated. In July 2019, the company definitively left the smartphone market. Despite the billions invested over 15 years, Intel never succeeded in breaking into the industry. It’s a stinging loss at a time where mobile phones are cutting into sales numbers for computer manufacturers, which are Intel’s main clients.
But more importantly, it seems as though Intel has lost ground in the PC and server processor sector, the very industry for which it is renowned. While Intel began producing 10 nm semiconductors in March, manufacturers Samsung and TSMC (which produce chips for Intel’s competitors AMD, Nvidia and Qualcomm) began producing 5 nm chips in 2020. Intel will not be able to reach a similar performance until 2022 or 2023.
Even Apple, Intel’s long-time client, has turned away. According to Bloomberg reports published on 23 April, Apple will no longer use Intel CPUs in its computers starting in 2021. Rumour has it that Apple will now use AMD processors or its own chips developed using ARM architecture and manufactured by TSMC.
As a result, according to Bob Swan, the PC-focused company must begin an urgent transformation to become more diversified. In 2019, the company generated 52% of its revenue from PCs and 33% from data centres, but only 6% came from memories, 5% from the Internet of Things and 1% from the automotive sector.
On 26 February, US company Lam Research, which supplies equipment used to make chips, announced that it partnered with ASML to develop a new metal deposition and chip engraving technology adapted to the EUV lithography process. Lam Research is expected to benefit from the large-scale deployment of EUV machines. The company also dominates the industry that processes photosensitive resin used to manufacture chips.
US company Micron Technology specialises in memory chips, of which it is the third-largest global producer. Specialised in dynamic random-access memory (DRAM) chips often used in PCs and servers, the company could increase its sales during the pandemic. Indeed, analysts expect that cloud players will increase their storage capacities and PC sales will take off again with more people working from home.
After reaching a record high of $315 in February, the share price of graphics chip specialist Nvidia dropped to under $200 in mid-March as a result of the coronavirus crisis. Unfortunately for investors looking for a good deal, shares have already returned to the top, trading at around $350 at the beginning of June, which is higher than before the pandemic. The US company seems rather well immunised against the coronavirus.
Nvidia generates more than 50% of its revenue from the video game market, an industry that’s booming during quarantine. In early April, for example, Nintendo asked its subcontractors to increase the production volume for its Switch products by 20% to meet the growing demand. The GPUs inside these Switch consoles are none other than Nvidia chips.
Beyond the video game market, Nvidia is diversifying even further and pursuing various markets such as data centres, supercalculators, autonomous vehicles and artificial intelligence. In December, the company unveiled its new Drive AGX Orin chip designed for autonomous vehicles. A few months earlier, the US company acquired Israeli start-up Mellanox, which specialises in multi- core chips, AI and data centres, for $6.9 billion.
As a fabless company, Nvidia has TSMC make most of its chips and as a result benefits from the Taiwanese manufacturer’s technological advance. The two companies are currently developing 5 nm GPUs, according to Taiwanese daily DigiTimes. This is a natural evolution, since the Nvidia 7 nm graphics cards will be released in 2020.
Number two globally in the automotive chip market, Dutch company NXP generates 47% of its sales in this industry, and the remaining 21% in telecoms infrastructure, 18% in industrials and 13% in mobile telephones. In April 2019, the company purchased shares of French start-up Kalray, which develops smart processors for data centres and autonomous vehicles.
Already top of the 4G cellular modems sector with a market share of nearly 50%, Qualcomm is a global leader when it comes to 5G chips as well (see also the July 2019 edition of Swissquote Magazine). But the drop in smartphone sales as a result of the pandemic could impact the company’s bottom line.
The conglomerate Samsung is a major player in the semiconductor industry. As the second-largest chip buyer globally in 2019 behind Apple, as well as the second-largest producer after Intel, the Korean company primarily produces memory chips, which make up more than 80% of its revenue in the semiconductor industry.
To manufacture electronic chips, a key ingredient is a raw material: silicon wafers. This industry is dominated by a handful of suppliers: Shin-Etsu and Sumco from Japan, Siltronic from Germany, GlobalWafers from Taiwan, and SK Siltron from South Korea. These five companies control more than 90% of the global market, estimated at $11.2 billion in 2019. Siltronic, which has a 15% global market share, supplies TSMC and Intel.
Despite the pandemic, Korean memory card manufacturer SK Hynix remains positive. The company closed Q1 2020 with $6.2 billion in revenue, up 4%. These positive figures are due to increased sales of DRAM memories and Nand flash used in data servers, which made up for the sluggish smartphone market.
“While SMIC operates the most competitive chip foundry in China, its semiconductors are still several generations behind those produced by TSMC, with much lower production volumes,” Len Jelinek from the consultancy Omdia points out. But most experts believe that SMIC will catch up to its competitors sooner or later, thanks to support from the Chinese government.
Created from the 1987 merger of Italian group SGS and French company Thomson Semiconducteurs, STMicroelectronics opened its headquarters in Plan-les-Ouates, Switzerland, but under Dutch law. A truly European venture. Jean-Marc Chéry defends the company’s European roots: “Europe must not lose the chip battle,” said the STMicro CEO in 2018 in an interview with French daily newspaper Le Figaro. “Keeping this industry and its expertise on our soil is very important.”
Ranked the European leader of the semiconductor industry in 2019, STMicroelectronics, which develops and manufactures its own chips, has a few tricks up its sleeve to compete with the US and Asia. The company has a diversified portfolio with business activity in the automotive sector, smartphones and industry. Its biggest client is none other than Apple, whose iPhones are equipped with several key components from STMicro.
In the automotive sector, the European company is focused on producing silicon carbide chips. Compared to traditional silicon which most electronic chips are made from, silicon carbide is used to make components that allow the battery to last longer. These silicon carbide parts can prolong the range of electric and hybrid vehicles. One of the first clients using this technology is US car manufacturer Tesla. Quite a big name.
Alas, the coronavirus crisis has significantly affected the smartphone and automotive industries. In Q1 2020, STMicro generated $2.23 billion in revenue, which is below its predictions of around $2.36 billion, and the company is predicting that Q2 will be even worse.
Known to the general public for its school calculators (sharing the global market with Casio), US group Texas Instruments is the seventh-largest global producer of electronic chips. The company produces semiconductors for all industries, including the automotive, industrial and smartphone industries.
The world’s third-biggest manufacturer, Japanese group Tokyo Electron hoped to merge with the number-one in the industry – US-based Applied Materials – to create a global giant. But the deal went under in 2015 after US authorities declined the merger. Since then, Tokyo Electron has been on its own. But it’s still doing quite well: from 2016 to 2019, revenue increased nearly 100%, going from less than $6 billion to $11.5 billion. The company supplies chip manufacturing machines to Samsung, Intel and SK Hynix.
Despite a global slowdown due to the coronavirus, Taiwanese giant TSMC is still generating staggering profits, almost as though there was no crisis. On 16 April, the company announced that its Q1 2020 revenue was up 42%, reaching $10.3 billion, and profits increased 90%, compared to the same period last year. While the name TSMC (Taiwan Semiconductor Manufacturing Company) isn’t very well-known, its products are nevertheless used in most electronic devices, including tablets, smartphones and cars. In fact, TSMC is the largest semiconductor manufacturer in the world: more than 50% of all electronic chips produced in the world come from TSMC factories.
But proceed with caution: TSMC doesn’t sell anything to the general public and doesn’t invent anything. As a manufacturer, it is happy to produce chips for other companies, most often fabless companies that don’t have their own factories, such as Apple, AMD, Huawei, Broadcom, Qualcomm and Nvidia.
TSMC widely dominates its industry because its fabrication plants are so productive. The Taiwanese company currently produces 7 nm chips and will soon move to a 5 nm version. Comparatively, Intel’s US factories can only produce 10 nm chips and GlobalFoundries is only able to produce 12 nm models. Thanks to its smaller chips – which as a result use less energy and are more powerful – TSMC is far ahead of its competitors. Globally, only Samsung Electronics can keep up with TSMC, but the Korean company specialises in memory chips, whereas TSMC produces more complex products such as graphics processors (GPU) and central processing units (CPU).
For Q2 2020, TSMC expects revenue between $10.1 and $10.4 billion, compared to $10.31 billion in Q1 2019. Of course, the smartphone industry, which makes up 50% of its revenue, will decrease in 2020. But this fall will likely be compensated by the deployment of 5G networks, which include many electronic components, as well as by the growth in the cloud computing industry.