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While there were concerns just a handful of years ago, the semiconductor industry is now experiencing booming conditions and the future is still looking bright.
According to experts, there is a wave of robust growth in the industry, as it expanded last year by 22 percent. Sales of the top 15 semiconductor businesses increased by 24 percent in the first half of 2018, compared to the first half of 2017.
Just a handful of years ago the industry was labeled as mature and weighed down with infrastructure. The development of semiconductors had become so costly that very few new companies could enter the market.
In the past year or so, experts have been pointing to a wave of growth with hundreds of new businesses coming into the market. Crucially, investment money is very accessible at the moment, especially for businesses creating new application-specific processors that provide a particular kind of functionality.
For decades, the semiconductor industry has been highly cyclical, with demand was powered by model cycles in the dominant end-user markets. Throughout the 1980s and 1990s, demand was mainly driven by the personal computer market. In the 2000s, the cell phone and then smartphone were the determinant of marginal demand.
In the past, unsustainable amounts of capital spending triggered a quick contraction when there is a softening in the revenue cycle, leading to excess capacity. This had been a signature feature of the industry's boom-or-bust cycle.
Recently though, the usage of chips has broadened significantly, and this is having an impact on the form of the semiconductor demand curve. The growing need for electronics to be everywhere is expected to engineer a very different length of cycle. It might be a slow, continuous building of a new industry, which is the internet-enabled anything.
The semiconductor industry is now moving in the direction of a new model that is more intently tied to the global economy. The industry is beginning to transition into more of a portfolio model; selling chips to put into various products and spreading returns across a greater quantity of assets.
The growth of the industry is also increasingly powered by more businesses designing their own chips. Bosch is building its own fab, for instance, while Tesla is looking to produce its own chips. The price tag on development has also fallen. New tools are facilitating chip development, and the use of high-level fabrication is slashing both costs and development times. High-level synthesis means have also made it possible to deliver a product in one-fourth of the time.
One of the biggest industry drivers right now seems to be growth in China. Massive investments are being made at both at the corporate and state levels, as well as in the manufacturing industry. The Chinese government is making annual investments of $20 billion in the industry, and this figure is being matched by private investors. The result is six times the investment of the US in the past few years and that’s a trend that is projected to accelerate.
The global market is shifting, and China’s investment splurge could pose a real risk to the on-going dominance of the US in this sector.
Tariffs and Trade Tensions
The United States currently has a massive semiconductor trade imbalance with China and that trade is being affected by tariffs put forward by the Trump Administration.
Since tariffs are directed at particular products, individual industries react differently. For example, electrical equipment and tech hardware companies could transfer 50 percent of the costs from tariffs directly to customers. However, semiconductor businesses would be more prone to pass on much less of the tariffs’ costs.
The issue is the semiconductor industry is highly reliant on both countries. Nearly all chips imported from China actually are developed by US-based businesses like Intel and Qualcomm. Some are created in the US shipped to China for evaluation and assembly. One outcome might be US businesses paying a tariff on their own products.
A lot is still unknown about the impacts of tariffs and the long-term trends for the industry still appear to be strong, with markets like autos and data centers expected to drive substantial shifts toward greater technological abilities and therefore more chips.
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