semiconductor wars

About 25 years ago, the semiconductor business began an evolutionary change, one that encouraged separation of semiconductor design from semiconductor manufacturing.

Four reasons for this:

cost. As semiconductor designs became more complex, the cost of a semiconductor fabrication plant (fab) began to breach the $1 billion level. This became a substantial barrier to entry, not only because of the capital needed for construction but also because its efficient operation required it spew out $3 – $4 billion of annual output. What startup had that kind of money or that kind of sales.

sharing not a thing. No one wants to share manufacturing space with a rival who operates a fab, for fear its designs will be pirated. At the very least, the subcontractor is supporting a rival’s operations. Apple’s withdrawal from Samsung’s fabs is a prominent example.

work in a bureaucracy? There’s a tendency for companies to lose their entrepreneurial spirit as they get larger and begin to be controlled by professional managers who don’t have product knowledge. Think: GM, Intel, Microsoft under Ballmer, Disney under Eisner. (An aside: I find that how well I’m treated when I call a company, say I’m a shareholder (i.e., a part owner) and ask for information is a good indicator. The bad ones tend to support only brokerage analysts, who then try to sell info about “our” companies to you and me.)

In any event, entrepreneurs tend to have little interest in office politics.

alternative solutions. One is the emergence of trusted third-party fab companies, called foundries, the best of which is Taiwan Semiconductor Manufacturing Company (TSMC). A second is the development of Arm Holdings, a UK-based company now owned by Softbank (but, assuming regulatory approval, being sold to Nvidia), which provides extensive software templates for use in semiconductor design.

The prime example today of the older integrated model is Intel (INTC). It remains wedded to an architecture introduced in 1978. Formerly the world leader, it has recently been passed in fab capability by TSMC and in chip performance by smaller rival Advanced Micro Devices (AMD), a TSMC and ARM customer.

INTC’s simpler chips for server farms are now also being supplanted by proprietary designs (ARM + TSMC) by Google, Microsoft and Apple.

where we stand today

To summarize, the most advanced semiconductor chips are being designed by US firms, using UK-based ARM architecture and manufactured by TSMC in Taiwan.

A state-of-the-art fab now costs well over $10 billion. One can be built just about anywhere there’s land, skilled workers, reliable electricity and water. As a practical matter, the decision about location comes down to tax breaks.

Oddly, but on reflection maybe not so (think: Trump Steaks, or his Atlantic City casinos), the Trump administration announced its policy of denying Chinese companies access to US designs, despite there not being a cutting-edge fab located in the US. That has belatedly become a priority. TSMC has agreed to build an older-generation fab in Arizona, Samsung a big fab in Texas. We’ve since seen, however, how unreliable the power grid is in Texas. Probably more important, pending voter suppression legislation in both states threatens the viability of these projects.

Investment implications tomorrow.

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