Global semiconductor industry poised for robust growth

With digital technology taking massive strides in the past 18 months and the demand for semiconductor chips outstripping supply, investment in this complex industry is sure to bring rewards.

Old Mutual, semiconductor industry

According to global research and advisory firm Gartner, by October 2020 two-thirds of organisations across the globe had increased or left unchanged their investment in cloud computing and AI. The survey also revealed that by mid-2021, 75% of respondents intended to accelerate new AI projects as part of a post-pandemic ‘reset’ as organisations look to recuperate from the Covid-19 pandemic. 

According to Andrew Dittberner, Chief Investment Officer at Old Mutual Wealth Private Client Securities, this advancing interest in digital technology is underpinned by a US$500-billion semiconductor industry that, simultaneously, is experiencing critical supply shortages – an impediment to recovery. 

“Semiconductor chips are the engine driving the technological transformation of the world. However, we find ourselves in the precarious position of relying on just a few companies to meet the world’s appetite for faster, more powerful and smaller semiconductor chips,” he says.

To illustrate, Google Cloud’s technical director in the office of the Chief Technology Officer, John Abel, recently said that Google Cloud has found that 76% of senior manufacturing executives are pushing investment into data and analytics, cloud computing and AI as a direct response to the pandemic. These astounding digital transformation statistics could be repeated across countries and industries such as e-commerce, which in South Africa has doubled in two years, adds Dittberner.

“Without semiconductor chips, there would be no machines to drive the information age. However, with a concerted global effort to manage supply and geopolitical risks, massive demand for growth in the semiconductor chip industry will make for attractive investment opportunities for patient investors,” explains Dittberner.

He is not surprised that demand has outstripped supply. “Everything we associate with digital transformation and the fourth industrial revolution drives demand. This extends from the need for cloud datacentre processing power, the rapid evolution of mobile technology driven by 5G technology and the Internet of Things.

“This hyper-connected world, augmented by AI and machine learning, becomes a self-fulfilling prophecy. The more technology evolves, the more accelerated demand there is for that technology,” he says.

According to Dittberner, given that demand for semiconductor chips is set to accelerate in the years ahead, it is key to understand the cause of the current shortage to ensure similar issues do not recur. “Fortunately, a step in the right direction has already been taken by stakeholders, and significant capital expenditure plans have been put on the table by several companies,” he says.

Dittberner says it is encouraging that these capital expenditure plans expand across geographies, thus ensuring a less concentrated supply chain, lowering the probability of future shortages. Examples of new projects include TSMC’s US$12-billion plan to build a foundry in Arizona and Samsung’s US$10-billion plan for a similar facility in Austin, Texas. 

“About 60% of the world’s semiconductors are currently manufactured in the Asia Pacific region, which presents significant geopolitical risk that has been exacerbated by US–China trade tensions,” he explains.

Many manufacturers have needed to curb supply to certain industries to keep pace with others, such as smartphones benefiting at the expense of cars. At the same time, the pandemic caused huge supply chain disruptions, ironically coinciding with the demand for remote working and home-schooling, which spiked demand for everything digital overnight.

The semiconductor industry is complex to navigate. From an investment perspective, many dynamics need to be considered, says Dittberner, including deciding which part of the supply chain to invest in and which companies to consider. “Each company is differentiated by its products, with no two companies producing the same products for the same use.”

He adds that identifying a single company that will be a major beneficiary over the long term is incredibly difficult. “We have therefore opted to invest via the iShares PHLX Semiconductor Exchange Traded Fund, which gives us broad exposure across the value chain. One thing is certain. The semiconductor industry as a whole is set to continue its robust growth and as such, it presents an exceptionally exciting opportunity for patient investors.”