Market Trends

Semiconductors: The real blue chips

Chip-manufacturing giants Taiwan Semiconductor Manufacturing Co Ltd. (TSMC) and Qualcomm have both recently reported blowout earnings, raising their revenue forecasts following a year of record highs. Worldwide sales of semiconductors totalled $113.6bn during the third quarter of 2020, an increase of 11% over the previous quarter and 5.8% more than Q3 in 2019. On top of all that, it has been a record year for consolidation within the sector, as the total value of deals exceed $100bn after a flurry of activity from heavyweights Advanced Micro Devices (AMD) and Nvidia. The semiconductor industry has not only survived but thrived in an extremely volatile year and is poised for further growth despite the ongoing pandemic and trade tensions.


Semiconductors form the silicon backbone of the civilised world, with billions of them inside just about everything around us, from smartphones to cars to thermostats. As these chips continue to shrink in size, the skills and capital investment required to stay at the cutting edge grows exponentially. This, combined with a winner-take-all dynamic in the sector, where a small advantage can lead to an outsized market share, has led to greater consolidation as industry leaders attempt to balance the competitive advantages offered by specialisation with the supply-chain vulnerabilities arising from such interdependence.

Late last month chipmaker AMD agreed to buy rival Xilinx in a $35bn all-stock transaction, a choice reflecting a skyrocketing share price for AMD, up 80% this year. With such a move, AMD seeks to leverage the surge in demand for robust communications infrastructure by supplying chips for data centres, echoing a similar move by Nvidia earlier this year when it acquired networking specialist Mellanox Technologies Ltd for $7bn. Nvidia’s spending spree carried on with a record-breaking acquisition of semiconductor designer Arm for $40bn earlier this year, despite considerable opposition citing fears of anti-competitive behaviour.

Such hefty transactions have been supported by record valuations for these companies, allowing for their stock to be part of the finalised deal. Despite some reservations by investors and analysts about these mergers, with concerns that such rapid consolidation across the sector is action for action’s sake and of no material benefit, there is no denying that there is a growing demand for chips to supply the ever-growing number of data centre servers and expanding 5G infrastructure. The pandemic has only accelerated the global shift into cloud computing and widespread adoption of the “internet-of-things”, all of which rely on these silicon chips.

Tension abroad

Some of the factors weighing in on the performance of the sector can be attributed to rising tensions amidst the ongoing trade dispute between the US and China. Earlier this year, the US government imposed sanctions on China’s largest chipmaker, Semiconductor Manufacturing International Corporation (SMIC). Citing national security fears, these measures compounded the damage done by earlier sanctions against Huawei in an attempt to restrict its access to global suppliers. Fears over further restrictions on China, the world’s largest purchaser of semiconductors, has a downward effect on US chipmakers.

There are already signs that the winds are changing on this front, with a fresh US administration coming into office in January likely to take a softer tone in order to defuse geopolitical tensions and utilising suave parlaying to manoeuvre out of this detrimental trade war. The tough sanctions are also showing signs of easing, with the US allowing a growing number of chip companies to provide Huawei with components as long as they are not used for 5G-related business — this includes chips for mobile devices. Samsung has already received licenses for some products, while Qualcomm and mediaTek could follow suit later this year.

Even so, this reduction of free trade has almost inadvertently acted as a boon to the chip industry. Emergency chip orders from Huawei as it sought to stockpile large stocks of semiconductors helped prop up sales across the board, particularly benefiting TSMC and Samsung’s semiconductor division. Accounting for roughly half of its operating profit, Samsung was quick to reinforce its strong performance by snapping up market share from rivals such as Huawei. Samsung released estimates that its operating profit rose 58% in the three months to September from a year ago to $10.6bn.

Light at the end of the tunnel

The overall market outlook remains positive and it is well-positioned to emerge in the post-covid era stronger than before. TSMC, a semiconductor behemoth which holds 50% of the global market for contract chip fabrication, raised its full-year revenue forecast as net income rose 36% year-on-year to $4.7bn. In a highly concentrated market where its closest competitor, Samsung Electronics, only accounts for less than 19% of the market and with no other single company holding more than 8% of market share, TSMC is closely watched as a bellwether for demand for electrical goods globally. 

TSMC’s promising performance and the rise of emerging trends such as cloud computing, 5G, the internet-of-things, and artificial intelligence make it clear that the semiconductors industry is here to stay. Its chips, and by extension semiconductors in general, underpin everything from consumer mobile phones to electric vehicles. Growing demand is broad-based as the pandemic has helped usher in an era of remote working which relies on data centres and connected technology. Nvidia recently reported that revenue from its data centre segment surpassed that of its graphic processing units (GPUs) traditionally used for video games, an encouraging sign that the recent trends are part of a larger paradigm shift.

Consumer appetite for 5G phones is also returning as smartphone makers prepare to launch the first generation of 5G-capable smartphones, most notably with Apple’s newest lineup featuring cutting-edge processors produced by TSMC and Qualcomm, a customer of TSMC and another chip manufacturer. 

These growth drivers are likely to offset the cyclical trends observed within the chip industry, as chip prices often fall after a period of heavy stockpiling in the face of market volatility and supply chain uncertainty. One might argue that the disruption conferred by the COVID-19 pandemic has helped propel the semiconductor industry along, as businesses across the world invest heavily in technology. The vigorous tailwinds accompanying such structural changes in the way we work and live will mean that we will be needing more chips than ever before.


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