Chip Wars

A New Semiconductor World Order

The global semiconductor landscape has witnessed a gradual, yet dramatic evolution over the last two decades. It took several years for old contours to give way to the new; and the transformation that began toward the end of the PC wave of computing accelerated well into the mobile computing era.

This post examines how market valuations and revenues of the major stakeholders in the semiconductor ecosystem have evolved over the last decade and illustrates the new contours taking shape in the semiconductor industry.

Background

Through the 1990s, Integrated Device Manufacturers (IDMs) were ideally positioned at the top of the semiconductor value chain and were able to extract the most revenues and the highest profit margins, by sequentially integrating chip design and silicon manufacturing. Over time, as the cost of advanced semiconductor manufacturing escalated, only the largest semiconductor companies commanded the scale to afford their own manufacturing. This paved the way for pure-play foundries like TSMC to carve a niche for themselves while also enabling pure-play design houses like Qualcomm and NVIDIA to establish themselves as domain-specific market leaders. As this ecosystem matured, consolidation led to a dramatic reduction, not only in the number of leading edge semiconductor chip manufacturers – from over 25 in the 1990s to just 3 today, but also in the number of semiconductor equipment manufacturers and Electronic Design Automation (EDA) vendors.

Among semiconductor companies, Intel was the clear winner in the PC era and remains standing as the only Integrated Device Manufacturer (IDM) of personal computer Central Processing Unit (CPU) chips today. Given its dominant role as the CPU vendor of choice, Intel grew to become much larger than other stakeholders in the ecosystem and for well over a decade was able to nearly unilaterally set the direction and cadence of Moore’s Law for everyone else to follow. But this outsized advantage diminished over time.

Today, even though TSMC commands an enormous manufacturing scale and market valuation, it is not entirely at liberty to set the direction and cadence of Moore’s Law on its own. TSMC was founded as a service business and its technology roadmap is heavily influenced by the product roadmaps and requirements of its largest customers and the roadmaps and capabilities of its suppliers like ASML and Applied Materials.

The mobile wave of computing flattened the semiconductor world order and made it highly interdependent, benefiting every major stakeholder in the ecosystem, including pure-play foundries (TSMC), pure-play design houses (e.g., Qualcomm, NVIDIA), equipment companies (e.g., ASML, Applied Materials) and EDA companies (e.g., Synopsys, Cadence).

Equipment Manufacturers

To get a sense for the enormity of the transformation that has occurred in the semiconductor manufacturing landscape it is worthwhile to compare the market valuations and annual revenues of the top two chipmakers (Intel and TSMC) with the top five equipment manufacturers (Applied Materials, ASML, LAM Research, KLA and TEL). 

Just a decade ago, Intel alone was valued nearly 2X that of TSMC and 4X larger than the top five equipment makers combined. Today, the market capitalization of the top five toolmakers combined is comparable to TSMC, and over 3X larger than Intel!

A decade ago, Intel’s revenue was 4X larger than that of TSMC and more than 2X that of the top five toolmakers combined. Today, the top five toolmakers combined make more revenue annually than Intel alone. Intel still leads TSMC in annual revenue, but the gap is smaller than it used to be. In effect, while the total market has grown larger, it is no longer dominated by a single entity alone. Samsung Foundry is the second largest semiconductor foundry, however being part of a larger conglomerate, its financials are not publicly available.

Significance: Up until just a few years ago, Intel commanded ecosystem and platform leadership with more resources to spend on research and development than the leading toolmakers combined. This gave Intel the upper hand in setting the direction and cadence of technology development, which in turn set the cadence for equipment makers and other players in the ecosystem. Today, the equipment makers collectively are just as, if not more influential than the chip manufacturers in driving fundamental research and development of new tools, new materials, and new processing techniques. This gives them a bigger say in setting the Moore’s Law roadmap.

It is also worth noting that there has been significant consolidation among the equipment providers. This consolidation is based on specific manufacturing domains – e.g., ASML is the only company that manufactures EUV scanners, arguably the most critical enabler of advanced semiconductor technologies. Applied Materials provides a disproportionately large share of deposition and ion implantation equipment, while KLA is the only provider of some of the most advanced metrology equipment. This suggests that the next major advancement will require active collaboration with the equipment ecosystem and will not be driven by the chip makers alone.

Fabless Chip Designers

An equally dramatic transformation has occurred in chip design. Intel competes not only with the foundries (e.g., TSMC, Samsung), but also competes with design houses like AMD and NVIDIA.

A decade ago, Intel made 1.7X more in annual revenue than the top five pure-play chip designers combined. Today, the top five chip designers combined make 1.5X more revenue than Intel, a massive swing within just one decade! While Intel revenues grew 1.4X over the last decade, the chip designers nearly quadrupled their revenue in the same period.

Significance: The leading chip designers are important customers of TSMC, Samsung and GlobalFoundries. Collectively, they consume nearly a substantial portion of the total foundry wafer capacity and thus are important stakeholders in setting the foundry technology roadmap and cadence. A decade earlier, Intel by itself was far more influential in setting the cadence and direction of Moore’s Law because the CPU was the most dominant and fastest growing silicon platform. Today, the mobile SoC is just as influential in setting the cadence and direction of Moore’s Law. Non-CPU architectures like the GPU and a variety of custom ASIC architectures are also becoming increasingly important and influential in defining process technology roadmaps.

System Integrators and Cloud Service Providers

During the PC era, Intel derived most of its revenue from Original Equipment Manufacturers (OEMs) like IBM (later Lenovo), HP, Dell, ASUS, and Acer. Even at the height of the PC era, Intel commanded much higher market valuations than most of its OEM customers. Today, Intel derives a large and growing portion of its revenues from Cloud Service Providers (CSPs) like Amazon, Microsoft and Google who don’t directly sell equipment incorporating Intel chips, but rather sell computing as a service using computing, networking and storage chips made by a variety of providers, and increasingly, their own internally designed chips.

Apple is not a pure-play design house, but rather a major system integrator of flagship consumer products like the iPhone, iPad, and the Mac. With Apple designing its own mobile SoCs for its consumer products, it is now a significant influencer of semiconductor process technology roadmaps and cadence. Even though Apple does not offer cloud computing as a service, the scale of its iCloud and ML/AI infrastructure is large enough to make it a dominant customer of cloud computing silicon.

Fifteen years ago, Intel annual revenues were 3X larger than those of either Google or Amazon, while Intel made nearly 2X the revenue of Apple! Microsoft was the only one of these 4 companies with a revenue higher than Intel. Today, these four companies earn 10X more in combined revenue than the three largest chipmakers!

Significance: These software, systems and service businesses which started and remain predominantly modular and horizontally oriented, are evolving into more vertically oriented ones when it comes to silicon compute platforms. Instead of being solely dependent on generic, merchant silicon from companies like Intel, AMD, or NVIDIA, these hyperscalers and system integrators are adding custom silicon as a differentiated layer to improve compute efficiency for specific workloads. Given their outsized scale, these companies are also beginning to influence foundry technology roadmaps. The major hyperscalers (Google, AWS, Microsoft) now comprise a fast growing portion of TSMC and Samsung annual revenues.

Electronic Design Automation (EDA) Vendors

A small, yet critical piece of the semiconductor ecosystem is the group of EDA companies, sometimes also referred to as Computer Aided Design (CAD) companies. The open foundry-fabless ecosystem enabled EDA companies to provide off-the-shelf, ready to use tools and infrastructure needed to bring a complex chip design to life. Over time, these companies also began providing foundational IP and other generic IP based on mainstream foundry process technologies. Cadence and Synopsys are the two primary EDA vendors with ANSYS being the third largest independent EDA provider. Until 2017, Mentor Graphics was the third largest independent EDA provider when it was acquired by Siemens for $4.5B. Since its acquisition, Mentor continues to play an important role, however, its financials are no longer public. EDA revenues grew a remarkable 3X over the last decade while market capitalization grew 12X over the same period. Assuming Mentor Graphics would have grown at a similar rate, the combined market capitalization of the top 4 EDA vendors would today be approaching $200B, comparable to that of Intel, AMD or Qualcomm!  

Significance: Traditional enablers of Moore’s Law scaling (e.g., geometrical shrink, new materials) now provide only part of the improvement from one process node to the next. Design-Technology Co-optimization (DTCO) is now an increasingly important enabler of process scaling. As design and process complexity has grown over time, the role of EDA companies has become increasingly important. In the next design paradigm, when chip design will increasingly leverage machine learning (ML) and artificial intelligence (AI) for tasks such as Place and Route (PnR) and verification, these CAD companies are likely to play an even larger role.

Democratizing Silicon Innovation

Easy access to silicon design automation (EDA) tools and to foundries offering manufacturing-as-a-service spurred massive growth in the number of silicon startups over the last decade. The growing importance of domain-specific accelerator chips to improve the performance and efficiency of AI and ML workloads was a major catalyst for this trend.

A vibrant foundry-fabless ecosystem made it relatively easy for even small startups to conceive and design new chip architectures and rapidly validate these designs on silicon with modest funding. Even small start-up companies can now easily access fully qualified, off-the-shelf, intellectual property (IP) blocks for a wide range of generic silicon circuits. This greatly diminishes the overhead to design complex chips and allows start-up companies to focus primarily on developing differentiated IP that would set their chip designs apart in the market. It is now possible for start-up companies to design on the most advanced silicon process technology simply by signing up to a foundry virtual design environment hosted in public clouds like AWS or Azure and supported by EDA companies like Cadence and Synopsys. In 2020 alone, $5.1B of venture capital poured into semiconductor startups worldwide – 5X more than the investment a decade earlier ! That number is estimated to be $7.8B for the full year 2021 and is forecast to be >$6B for 2022 (Link) with over 50 firms developing chips for AI applications alone.  

Significance: Until a decade ago, silicon innovation was considered the exclusive domain of incumbents like Intel, NVIDIA, or Qualcomm and venture funding for semiconductor startups was hard to come by. Entrepreneurship around chip design is now experiencing a renaissance in what many are calling the new golden age of computer architecture. It is still too early to know with certainty if a new challenger(s) will emerge to displace the incumbent giants – perhaps what is more likely is that the most promising startups will get acquired by the incumbents as they seek to differentiate and secure their leadership in the next wave of computing.

Takeaways

The semiconductor landscape has witnessed a dramatic transformation over the last two decades. What used to be a largely unipolar industry is now a complex, multi-polar ecosystem with several large and highly influential stakeholders. Domain specific consolidation has resulted in fewer but much larger players with “single-points of failure” within nearly every technical domain. Geographic consolidation has resulted in the semiconductor industry becoming the source of major geo-political tensions, trade, and tariff wars. Finally, the COVID-19 pandemic proved to be a tipping point for a global chip supply shortage that catapulted companies and governments to shore up and secure their supply chains.

A consistent cadence of technological progress has set apart the semiconductor industry from any other in human history and has underpinned nearly all aspects of technological evolution; indeed, of all human progress over the last 50 years. The mobile wave of computing flattened the semiconductor world order and created a multi-polar industry wherein the predictable pace of progress is no longer driven by a single entity alone; rather this progress will now require close collaboration between multiple large and disparate corporations and governments alike. It will also require massive capital outlays, beyond the reach of any single entity alone. And finally, it will require collaboration across international borders while maneuvering around geopolitical hotspots. The semiconductor landscape continues to evolve in the post-PC and post-mobile computing era – by the end of this decade, we are likely to witness a new semiconductor world order, shaped by the needs of the next wave of computing.

The views expressed herein are my own.