Investment Professionals


The Fundamentals Keeping Chips Hot


Semiconductors, or microchips, are like the brains that enable electronic devices – from televisions to phones and computers – to function. They are so ubiquitous that we can just forget they are there.

Semiconductors have strongly outperformed


Source: Solactive, 14 July 2021

However, the ongoing semiconductor shortage, which has increased wait times for some semiconductors to 18 weeks as of June 2021 according to Bloomberg, has raised the visibility of this crucial sector.

Strong sales growth, supported by megatrends

Semiconductors are at the heart of future technology. Megatrends – such as electric vehicles, smart factories, the internet of things – all require semiconductors to operate. In many cases, advancements in technology have only been possible due to improvements in semiconductors.

Semiconductor industry has seen strong sales growth

Semiconductor_industry_has_seen_strong_sales_growth_b6007a5ced.pngSource: Thomas Alsop, Statista, 12 July 2021

Their central role in technology has meant industry revenue (pictured above) grew at a rate above GDP growth well before the pandemic, despite the dip in 2019 caused by the Trump trade war. And is forecast by PwC to grow at a CAGR of 8.6% right the way to 2028.

There are several exciting future trends driving semiconductors. They include:

  • Electric and self-driving cars

  • Cryptocurrency (semiconductors are used for crypto mining)

  • Artificial intelligence, as it requires graphic processing units or the newer AI chips

  • Video games and cloud computing, given their use in consoles and servers

The latter three areas – AI, cloud computing, eSports – are experiencing strong growth, and taking semiconductors with them.

But electric and self-driving cars are perhaps the most exciting.

Semiconductors have broad sources of demand

Semiconductors_have_broad_sources_of_demand_496106bcf1.pngSource: World Semiconductor Trade Statistics, 12 July 2021

Cars currently make up 10% of the overall demand for semiconductors, data from World Semiconductor Trade Statistics (2020) indicates.

While substantive, this is still small. But the electric vehicle market is forecast to grow at an impressive 25-40% a year this decade, as the world rides out to meet the challenges of global warming.

And electric vehicles need far more semiconductors than petrol-guzzling cars. This is reflected by the rising cost of electronics as a percentage of total car cost (below), which is projected to rise to almost 50% by 2030.

All electronics as % of total car cost

All_electronics_as_of_total_car_cost_ee4a6a05e5.pngSource: IHS, Deloitte analysis, 1 July 2021

High barriers to entry and R&D spend

Semiconductor businesses are protected by high barriers to entry. The industry is extremely capital intensive, with