How a Handful of Chip Companies Came to Control the Fate of the World

The fate of the world is under the control of a handful of semiconductor companies and in this great whitepaper, Brinton Johns and Jon Bathgate of NZS Capital, explain how it happened.

The fate of the world lies in the hands of less than 12 semiconductor companies and those semiconductor companies are Taiwan Semiconductor Manufacturer (TSMC), ASML, Lam Research, Cadence, Synopsis and KLA-Tencor.

And the loss of the following crucial chip making companies - NVIDIA, Samsung, Intel, Texas Instruments, Xilinx, Broadcom and Microchip Technology - would further bring a setback to the digital transformation of the economy because semiconductor chips are used to do almost everything in the world today like flying, booking rides, ordering food, diagnosing diseases, treating diseases, increasing crop yields for food and supporting the military.

Right now, we live in a world where more than half of all semiconductors being manufactured is done on an island (Taiwan) whose sovereignty is in dispute, one organization named ASML has a huge lead in photolithography (essential in adding lots of transistors on a wafer using extreme ultraviolent light), almost all memory (95%) is made by only three companies (Samsung, SK Hynix and Micron) and where it's almost impossible to design a chip without using the software of either Cadence or Synopsis.

The cost to design, test and develop semiconductor chips has increased by 100s of millions of dollars because of all the complexity required in the process. For example, the machine manufactured by ASML that is used to increase the density of transistors on a chip by using extreme ultra violet light costs almost $200 million and are so complex that a decade ago many scientists thought it would be impossible to make.

Chip manufacturing has become so complex that it can’t be done without electronic design automation. Electronic design automation uses software tools to help map out a semiconductor chip so it can be manufactured and function properly. There are only two companies (Cadence and Synopsis) that make the software advanced enough to design the high end chips being built today.

And while there were 10 DRAM memory makers in 2009, there are only three that account for 95% of the revenue in the DRAM memory market today [June 2021] because of consolidation which was started by Hock Tan, longtime CEO of Broadcom (Avago), who saw a good opportunity to buy competitors at a discount after their assets became cheap following the 08 financial crisis and when money was cheap as well. 

Then what followed was other memory makers started noticing that the memory industry was starting to become more secular and less cyclical because of the expanding total addressable market as cloud computing, AI, mobility and the internet-of-things emerged on to the scene. This resulted in $107.7 billion being spent on M&A in 2015, $59.8b in 2016, $28.1b in 2017, $25.9b in 2018 and $31.7 in 2019. 

That is how the market share of the memory makers got concentrated in so few companies but what about fabrication?

Right now, the biggest chip producer in the world is Taiwan Semiconductor Manufacturing which made almost 11,000 products for big tech companies (Microsoft, Facebook, Amazon, Apple and NVIDIA) and makes 53% of the $70b third-party fabrication market as of January 2020 with Samsung coming in 2nd at 18% and Global Foundries coming in 3rd at 8% (Intel isn’t included here because they aren’t a 3rd party contractor).

The CEO of Taiwan Semiconductor Manufacturing was previously the head of Texas Instruments' semiconductor business but was passed up for the CEO role so he went back to Taiwan where he started Taiwan Semiconductor Manufacturing which he turned into the leading chip manufacturer by choosing to not compete with other semiconductor companies on design, by helping companies retain more capital (semi factories are costly to build) and by getting really good at what they do - building  semi chips.

TSMC's dominance has brought the attention of the US government because 60% of TSMC’s revenue is from American companies and China said on May 20, 2020 that reuniting Taiwan and China can’t be stopped.

The US government is trying to deny China access to some critical inputs that are essential in producing semi chips so China has committed to investing $100B in their semiconductor industry to reduce its dependence on the critical components that US companies produce but due to the complexity of making these critical inputs it will be hard for China to achieve 100% independence.

Semi companies have seen their stock prices have lots of success since 2009. The 30 member Philadelphia semiconductor index is up 377% from 2009-2019 and Lam Research’s - a semi company that is crucial to DRAM and NAND memory - stock price is up 14x since February 2009.

The profit margins for semiconductor companies now compare with software companies and the outlook for these companies continues to be bright due to the huge tailwind they have from the internet-of-things, AI, cloud computing and more.

So what happens next, Brinton Johns and Jon Bathgate ask.

Predicting the future is not easy but it's likely now that China is not positioned to recreate the technology of semi companies like Cadence, Synopsis, ASML, Lam Research, TSMC; these semi companies will continue to be heavily relied upon and the strong performance that the semiconductor industry is currently having will likely continue.