Major Industry Trends
If there is one sector that is changing the nature of the world we live in faster than any other, it is electronics. From mobile phones to the internet, from telecommunications to satellite TV, electronics are ubiquitous, and advancing by leaps and bounds, with more power being crammed into less space year on year. It is fashionable at this point to quote Moore’s law. Geoffrey Moore was the co-founder of the PC chip company, Intel, and the man famous for predicting that the number of transistors on the same-sized piece of silicon would double every two years—without bothering even to imply an end date for this process.
A few years ago, it was thought that Moore’s law was running out of steam, as circuits were (a) becoming small enough for quantum effects to introduce instability in current flow, and (b) becoming crowded enough for the heat generated from operating the chip to start to be a real problem. However, advances in silicon substrate technology (the introduction of metal oxide gates, for example) opened up the door again, and Moore’s law still holds good. Instead of Intel merely producing one central processing unit (CPU, the calculating “heart” of a microcomputer) on a chip, it produced first two CPUs per chip, then four, then eight, and we are very close to 16-CPU chips, with higher multiples possible and planned beyond this.
Simultaneously, the software industry is on a steep learning curve as it rewrites its applications to take full advantage of the vast amounts of processing power becoming available, whether at the server, on people’s desks, or on a plethora of handheld devices, from palmtop computers to mobile phones and tablet PCs. These were first popularized by Apple’s iPad, but by 2011 virtually every hardware manufacturer seemed to be producing a tablet PC.
As the amount of cheap computer power available to engineers has increased, the power of electronics to transform the world has moved forward in leaps and bounds. No part of industry is now untouched. The ability to simulate real physics inside “the box” has allowed car makers to stress-test both virtual parts and the whole design, long before metal goes anywhere near being machined. In advanced medicine, biosciences companies model molecules and processes to predict drug interactions on target proteins or cell constituents, before any real-world work is done. In the oil and gas sector, vast data sets from seismic and advanced scanning of reservoirs are turned into visual, three-dimensional models that geologists can “walk through,” to examine reservoirs “from the inside” before any well is drilled.
The ability to create and explore real physics through virtual models increases dramatically with each new breakthrough in processing power. Advances in electronics truly have the power to change the rules for whole industries.
The electronics manufacturing sector is generally separated from the electrical manufacturing sector by a technical distinction. Under this, the term “electronics” refers to the flow of charge through non-metal conductors, such as silicon in semiconductor implementations, and “electrical” refers to the flow of charge through metal conductors. Electrical is all about wires, and electronics is all about semiconductors, broadly speaking. The latter leads to printed circuit boards (PCBs) and memory chips, while the former leads to white goods and power stations (with the proviso that almost all electrical goods these days have some PCB-controlled circuitry somewhere).
From an industry perspective, electronics has spawned a vast range of specialist industries, from the IT industry (dominated by the likes of IBM, and its competitors, at the mainframe end, and Intel and AMD at the PC end), to the mobile phone market. It includes TV set manufacturers, videogame consoles, and, across an array of industry sectors, a vast army of specialist control-systems manufacturers, not to mention the aviation and auto sectors, both of which could not exist in their present forms without massive input from the electronics sector. Then there is the medical devices market, and so on.
Asia, today, is regarded as the powerhouse of PCB and memory-chip production, yet it all began through a combination of some breakthrough research in Japan, and US companies outsourcing first PCB assembly, then PCB fabrication, to Asia to take advantage of cheap labor rates. Today, Asia’s dominance in motherboard and memory-chip manufacturing has reached the point where a US air force colonel, Charles Howe, was prompted to write a strategic study looking at the potential impact on US national security of having so much of the electronics industry outside the United States.
The point is not without irony, as the semiconductor industry began in the United States with innovations such as Texas Instruments’ invention of the integrated circuit in 1958, and Intel’s production of the first 8-bit microprocessor, the 8008, in 1972. Howe’s study gives a very clear account of the integrated circuit (IC) design process. The basic design process requires electronic design automation (EDA) software in the hands of experts. Fabrication involves “etching” or imprinting the designs onto silicon wafers.
Each new generation of chip tends to require either a totally retooled fabrication plant (“fab”), or a new plant built from scratch. Each plant costs around US$3 billion, which means that each new generation of chip represents a huge bet by the manufacturer that it can sell vast numbers of its chips to the various global markets.
Very few companies in the world can bet on that scale and get it wrong twice, so semiconductor chip manufacturing is a game with very high entry costs, and is played for very high stakes. Asian chip companies generally play a safer game, and focus on producing not CPUs, but peripheral components, such as motherboards and memory chips.
The entire semiconductor industry is tremendously vulnerable to downturns in the economy, as in all markets, from PCs to mobile phones, the sale of new products is predicated on global growth. There is no doubt that the semiconductor industry suffered heavily from the global downturn of 2008 as both businesses and consumers cut their discretionary spending. For businesses, this meant cutting back on IT projects, and for consumers it frequently meant economies, such as not replacing last year’s mobile phone with this year’s latest model. The impact on sales was marked, with the sector recording its first year-on-year drop in sales, at the end of 2008, since the dot.com crash of 2001.
Since then, things have improved markedly but the vulnerability of the sector to headwinds in the global economy remains a problem. In its November 2012 forecast for the global semiconductor sector, the World Semiconductor Trade Statistics organization (WSTS) predicted that the semiconductor market would recover somewhat in 2013 after a slight contraction in 2012. The WSTS forecast that when all the figures are in, the world semiconductor market in 2012 will be seen to have fallen short by some 3.2% on its performance in 2011, a drop in revenues for the sector of some US$290 billion. However, the WSTS sees a recovery of some 4.5% of growth for 2013, with revenues topping US$303 billion. This is some way short of the 7.2% growth in 2013 that the WSTS was predicting back in Spring 2012, and the WSTS blames the shortfall on “growing uncertainty in the world economy, including China’s slowdown.”
No one escaped the pull back in 2012, with all regions showing negative growth for all product categories, apart from logic and optoelectronics. The WSTS expects Europe to be the hardest hit, with production set to decline by 10.7% by comparison with 2011, to US$33 billion.
If the decline reverses in 2013 as the WSTS anticipates, then the world market should grow by 5.2%, to US$319 billion in 2014, with most regions seeing solid mid-single-digit growth in most product categories.
The Consumer Electronics Association (CEA), in association with the market research firm GfK, comes in slightly under the WSTS figure, as it is concerned with electronics sales generally. The worldwide electronics industry’s sales should be worth some US$1.105 billion in 2013, reversing the 1% drop in 2012. The 2012 drop was not, however, evenly spread. Sales in advanced economies contracted by some 4% while emerging markets grew sales by some 3%, resulting in the headline 1% drop.
Devices such as smartphones and tablets are expected to be a major driver of growth in 2013, but the growth in tablet sales is partially at the expense of PC sales, which are in fairly dramatic decline. In the United States, some 44% of homes now have tablets, by comparison with just 1% of homes in July 2010, with 55% of homes having one or more smartphones.
The Asian Semiconductor Industry
The Asian semiconductor industry began in the 1960s, with small pockets of foreign investment. Japan established a semiconductor industry in the 1970s, and in 1979 Fujitsu became the first company to mass-produce 64KB memory chips, with Japan cornering the world market in memory chips by the mid-1980s, passing the United States in semiconductor production volumes. By the late 1980s, South Korea had developed a thriving memory-chip industry, with companies such as Samsung enjoying rapid growth. Taiwanese investment generated the world’s first “on-demand, fab-for-hire” plant, and Singapore, Malaysia, and China have all developed significant chip industries.
According to Colonel Howe’s study, the first US outsourcing investment in the sector was by Fairchild Semiconductor in Hong Kong in 1961. Outsourcing began with chip assembly (bringing the various components together to complete a printed circuit board), then moved to fabrication, and, later, in the 1980s, to chip design.
Asia now accounts for around 60% of global sales, and is home to many of the world’s leading chipmakers. According to the Semiconductor Equipment and Materials International (SEMI), the global industry association serving the manufacturing supply chain for the micro and nanoelectronics industries, investment in fab equipment continued during 2012, despite the disappointing second half to the year. SEMI was originally expecting installed capacity in fab plants around the world to increase by 5.3% in 2012. By May 2012, it had revised that figure down to just 3.6%. Logic chips will be a good part of this growth, with a 6% capacity increase, followed by foundries, with 5% growth and memory chips are expected to see growth of 3%. By the end of 2012, some 10 companies would control around 50% of total global capacity, SEMI says. In 2013, a number of new fabs are expected to be built, with equipment spending at record levels. The growth in capacity should reach 7% during 2013, SEMI says. Top of the regional list for fab spending in 2013 will be the Americas, with US$2.8 billion of spending, followed by Taiwan (US$1.3 billion) and Korea (US$1.1 billion).
The semiconductor industry has already enabled software designers to go some way down the road to “virtualizing” our world, creating immensely powerful tools for solving real-world problems far faster than ever before, and enabling new products, new drugs, and new forms of entertainment (of which the videogames console and the mobile phone are two stunning examples) to be brought to market extremely rapidly.
It is a safe bet that this sector is going to change life as we know it almost beyond recognition over the coming decades. As such, it is certainly a sector worth watching.