The lucrative semiconductor supply chain

semiconductor

I thought for a long time and wanted to write some articles about investment in the semiconductor industry, because this is really an important industry to all people no matter you are an investor or not. Considering many factors, I will write this summary today, and then I will write about other semiconductor sub-industries later. Regarding the semiconductor chip industry, I suggest you to refer to the description of my following blog articles:

The universality of semiconductors

The main reason for the hesitation in thinking about it for a long time is that the hardware industry is not easy for ordinary people to understand compared to the software industry, unlike the software industry. Because of my work and career, I happened to spend most of my time in these industries.

I have a deep understanding of these three fields (software, hardware devices, semiconductors), and I have been thinking about how to be able to see it as an average investor. Understandable text, describing the relationship between these three industries and the impact on investors. And the semiconductor is a more specialized sub-industry in the hardware industry, and it is even more difficult to understand. There are many reasons:

  • As I said in section 3-2 of the book “The Rules of Super Growth Stocks Investing”, software is ubiquitous and not only easy for ordinary people to understand, because it is closely related to modern life, the top few stocks in the stock markets of various countries are all software in a broad sense. Stock investors are unlikely to know nothing about software listed companies.
  • The hardware industry, especially the semiconductor industry, has considerable barriers to entry, and it is unlikely that ordinary investors will figure it out on their own. It is really not easy to understand some main terms or concepts.
  • Investors do not understand things, companies that are not in their own circle of competence, investors are unlikely to make a lot of money from them. This principle is also repeatedly emphasized by many successful investors.

However, semiconductors actually have a significant relationship with modern people, but ordinary people don’t know it:

  • Without semiconductors, there would be no computers and mobile phones. The popularization of technology evolution in the past 40 years cannot be achieved by mankind.
  • To a certain extent, semiconductors are “software” that can be seen, but cannot be modified, and run at a faster speed. Yes, you read correctly. Semiconductor chips are another form of software.

The semiconductor industry’s investment return is excellent

For investors, the semiconductor industry should not be ignored for a simple reasons:

  • Many companies in the semiconductor industry are highly competitive, many companies have substantial monopolies, and the moat is very wide; especially for companies that have existed for a long time, their products are very low in substitution.
  • The average investment rate of the semiconductor industry is much better than that of other industries. Even in the technology industry, the valuation of chip design companies in particular is very high, some chip design companies even have higher than that of software companies. I also mentioned this in section 3-2 of the book “The Rules of Super Growth Stocks Investing”.
  • Companies in the semiconductor industry are among the very few listed companies in the technology industry that will distribute dividends, and their yields are generally not bad, and even some monopolistic companies have yields higher than the S&P 500 average (pure software companies are stingy if compare to semiconductor industry). The reason is simple, there is an endless supply of cash.

Semiconductor investment is too difficult for average people

Everyone knows that Buffett does not invest in technology stocks because he is not in his ability circle; but most people know that this is because he is already well-known, even the richest man, and after he became friends with Bill Gates, he often cited his lack of knowledge of the technology industry as a reason. For example, we do not invest in Microsoft (ticker: MSFT) and Intel (ticker: INTC).

But few people know that he was a member of the board of directors of Green College for free in his early days, assisting in investment matters. Intel’s founder, Robert Noyce, was an alumnus of Grinnell College. When Intel was first founded, he offered his alma mater a large share of stock subscription opportunities, which allowed Green College to make a lot of money at the time of Intel’s IPO.

The important thing is, by Buffett’s shrewdness, if Intel is within the scope of his ability circle, he will not miss it, of course, all this is negative, he also missed the opportunity to make money from it (please note that I personally don’t think Buffett himself would think he missed Intel’s IPO).

Another investment guru Peter Lynch also admitted that he didn’t understand what semiconductors are at all (he only had VLSI in his era), and used this as an example to remind investors that they must invest within their own ability circle to succeed.

Semiconductor industry supply chain

There are six areas for the semiconductor industry, including software design tools, chip designers (processor, memory, communication, car chips, Analog chips), materials, foundry, and package and testing, and manufacturing equipment. According to this principle, the semiconductor industry can be divided into several main categories. The following are only preliminary categories. Only the most important first few representative manufacturers in each category are listed here, so that ordinary investors can better Easy to understand:

Sub-categoryMain businessTypical companies (ticker)
Software design tools Chip design tools CDNS, SNPS, SIEGY, ANSS, KEYS
ProcessorHPC, x86, ARM, GPUINTC, NVDA, AAPL, AMD, ARM(SFTBY)
MemoryMemory and storageSSNLF, SK Hynix(KRX: 000660), MU, TOSYY, WDC, INTC
CommunicationModem, wireless commmunication, radio frequency, base stationQCOM, AVGO, MTK(TPE:2454), SSNLF,
AAPL, HiSilicon, UniSoc(SHA:000938), AVGO, SWKS ,QRVO, NXPI, INTC, ZTE (SHA:000063)
Car ICMCU, IGBT, SensorIFNNY, STM, ADI, NXPI, MCHP, ROHCY, ON, RNECY, TXN, SONY
Analog ICPMIC, DSP, Audio, VideoTXN, ADI, CRUS, Dialog(FWB market DLG), MTK(TPE:2454),Realtek(TPE: 2379)
FoundryChip manufactureTSM, SSNLF, SMIC (HKG:0981), UMC, GFS, INTC
Semiconductor equipmentSemiconductor equipment providersASML, AMAT, LRCX, KLAC, SMEE (SHA:688981), Advanced Micro (SHA:688012)
Package and testingChip package and testingAMKR, ASX, JCET(SHA:600584)
Semiconductor materialsSemiconductor materials DD,Tokyo Ohka Kogyo(TYO:4186), SOMMY,JSCPY,TOELY, SUOPY, Global Wafers(TPE:6488),AJINY,FUJIY,Sumitomo Bakelite(TYO:4203)

Characteristics of the semiconductor industry chain

There are some obvious differences between the semiconductor industry chain and other industries:

  • Most of the sub-categories of the semiconductor industry chain have high barriers to entry. And companies in these categories with high barriers to entry have existed for a long time.
  • Remind everyone that the top two or three in almost every category have a certain degree of strong moat; even monopoly.
  • The semiconductor industry chain has a special feature. It is the basic component of hardware terminal products to end consumers, and there are thousands of components in a typical modern device. The main key components go wrong, even if the other thousands of components are okay, they can’t be shipped. Therefore, the management of the supply chain is always the highest priority. I highlighted this in section 3-2 of my book “The Rules of Super Growth Stocks Investing”.
  • Since the components come from different manufacturers, it is necessary to spend a lot of time on parameter tuning to find the most appropriate (may not necessarily be the best) combination of the overall matching effect, so that consumers can achieve the best end-use experience. Therefore, once a component is used, unless there is a special reason (the probability is very low), no one is willing to ask for trouble (and is not allowed) to replace it with a component of a competitor with the same function, and redo the product adjustment process that has been obtained for many years. Once again, because the unknown risk is too great, consumers may even be sued in court for liability. Samsung’s battery explosion is a vivid example. After the package was released, Samsung lost $1 billion and lost all the Note series phones that were once Samsung’s second largest source of cash flow.
  • Because electronic originals have a service life and cannot be recycled, that is, finished semiconductor products are disposable products, which are not environmentally friendly, but it is a good thing for manufacturers. In terms of the way a certain product is adopted, the semiconductor industry chain is also considered a subscription system. Four or five years ago, I installed the Windows programs I wrote 25 years ago and many software packages at that time on the latest version of Windows 10, and they all still work (the personal software industry used a one-time buyout 20 years ago.
  • After paying a sum of money for the software, it is yours. You can use it as long as you like); but the hardware components are not available, let alone after 20 years, even ten years are difficult, most of the electronic components are broken. According to the statistics of the market research company Statista, the life of iPhone can reach 6 years, and that of Android phones is about half; Apple’s own suggestion: Apple gives this answer-MacBook and Apple TV have a lifespan of 4 years, and iPhone and iPad have a lifespan of 3 years.
semiconductor

The semiconductor industry is still controlled by U.S.

The last thing to remind everyone is: Don’t be overwhelmed by TSMC’s current achievements in wafer foundry. TSMC only accounts for more than half of its manufacturing and listing, and its main technologies and suppliers are in the hands of Americans. In a word, the semiconductor industry is still firmly controlled by the Americans, and most of the money in this industry is made by American companies, and this will continue to be the case in the mid to long-term foreseeable future.

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