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 cofounder 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 suggest 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 both becoming small enough for quantum effects to introduce instability in current flow, and becoming crowded enough for the heat generated by the chip to begin to be a real problem. However, advances in silicon substrate technology (the introduction of high-kappa gate dielectrics, for example) opened up the door again, and Moore’s law still holds good. Instead of microcomputer manufacturers like Intel merely producing one central processing unit (CPU, the calculating “heart” of a microcomputer) on a chip, we started to see two CPUs per chip, then four, then eight. By 2013 Intel’s Xeon Phi processor, designed for extremely powerful supercomputing applications, provided more than 60 cores (CPUs). 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 that are becoming available, whether at the server, on people’s desks, or on a plethora of mobile devices, from smartphones to tablet PCs.
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 carmakers to stress-test both virtual parts and the whole design long before metal goes anywhere near being machined. In advanced medicine, bioscience companies model molecules and processes to predict drug interactions with target proteins or cell constituents before any real-world work is done. In the oil and gas sector, vast sets of data from seismic profiling and advanced imaging 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. According to this, the term “electronics” refers to the flow of charge through nonmetal conductors, such as silicon in semiconductor implementations, and “electrical” refers to the flow of charge through metal conductors. Broadly speaking, electrical is all about wires, and electronics is all about semiconductors. 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 control 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, at the PC end, Intel, Advanced RISC Machines (usually known just as ARM), and Advanced Micro Devices (AMD)—to the mobile-phone market. It includes TV-set manufacturers, video-game 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.
Today Asia 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, wrote 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 design process. The basic design process requires electronic design automation (EDA) software in the hands of experts. Fabrication involves “etching” or imprinting the designs on to silicon wafers.
Each new generation of chips tends to require either a totally retooled fabrication plant (a “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 in 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. By late 2013 and going into 2014, the switch in consumer buying habits from PCs to tablets and smartphones led Intel to offer to use spare capacity in its fabrication plants to make products for other semiconductor companies—a move that would have been almost unthinkable five years earlier.
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 model. The impact on sales was marked, with the sector recording at the end of 2008 its first year-on-year drop in sales since the dot.com crash of 2001.
Since then things have improved markedly. In the report issued after its November 2013 forecast meeting, held in Taipei, Taiwan, the World Semiconductor Trade Statistics organization (WSTS) said that it expected to see steady growth in the market through to 2015. The worldwide semiconductor market would reach US$304 billion in 2013, up 4.4% from the figure in 2012, driven mainly by double-digit growth in demand for memory chips. The WSTS forecast growth of 4.1% through 2014, with the market reaching US$317 billion, moving beyond the high of US$300 billion registered in 2011. By 2015 the WSTS expects the worldwide semiconductor market to be worth US$328 billion, up a further 3.4%. According to the WSTS, “All product categories and regions are forecasted to grow positively in each year, with the assumption of macro economy [sic] recovery throughout the forecast period.” It expects the wireless and automotive sectors to show the strongest demand, with demand in the consumer and computer segments being more or less static.
Moving beyond semiconductor sales to global sales of consumer electronics, the Consumer Electronics Association, working with the market research firm GfK, predicted in January 2013 that the total sales for 2013 would rise some 4% to $1.1 trillion, after the 2012 figure fell by 1%, by comparison with 2011, to $1.06 trillion (as quoted in the International Business Times).
The drop in 2012 was not evenly spread across geographies. 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 were a major driver of growth through 2013, but the growth in tablet sales is being achieved partially at the expense of PC sales, which are in fairly dramatic decline. In the US, 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 smart phones.
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 64 kb memory chips, with Japan cornering the world market in memory chips by the mid-1980s, passing the United States in semiconductor production volume. 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 Charles 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. SEMI, the global industry association serving the manufacturing supply chain for the micro- and nano-electronics industries, forecasts strong growth for 2014 after a serious contraction of 13.3% in 2013 in sales of new semiconductor manufacturing equipment. 2014 should deliver growth of around 23%, with 2015 also expected to deliver growth, albeit on a more modest level. SEMI’s 2013 year-end forecast predicts that wafer-processing equipment, the largest product segment by dollar value, will decrease 10.7% in 2013 to around US$25.1 billion, which is down to 2004 spending levels. The market for assembly and packaging equipment will fare even worse, contracting by 22.1% to US$2.4 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 video-games 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.