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They are everywhere: in our homes, our cars, at work and even soon under our skin. What are “they”, you ask? Electronic chips, of course. First invented in the 1950s, they have gradually taken over the planet and have now become omnipresent in all of the devices we use every day. Since 2017, more than 1,000 billion chips are produced each year in fabrication plants – gigantic factories that make semiconductors for all the tech companies, such as Apple, Huawei, Nvidia and Qualcomm. And the takeover has just begun: “The fundamental trend for the next 10 years is more and more semiconductors,” said Hugo Paternoster, an industry expert at AlphaValue. “Volumes will increase as smart objects, including cars, become more available to a wider range of consumers.”
While waiting for this prosperous future, the semiconductor market is experiencing a difficult period. Before the coronavirus crisis even began, the market had experienced a disappointing 2019, with a drop in sales of 12.8% over one year, to $409 billion. A loss of this magnitude hasn’t been recorded in 10 years. “The macroeconomic situation was complicated in 2019, with slowed growth in China, the US-China trade war and sluggish smartphone sales,” said Frederic Yoboué, industry analyst for the Bryan, Garnier & Co. investment bank. “Prices dropped even more significantly given that chip manufacturers invested very heavily in 2017, when the price of semiconductors skyrocketed. When demand flipped in late 2018, manufacturers had far too many chips in stock and surplus production capacities, which led to a very sharp price drop.”
For everyone in the industry, 2020 was supposed to be a year of recovery. In December 2019, World Semi- conductor Trade Statistics (WSTS) predicted 5.9% growth for this year and 6.3% in 2021. But COVID-19 now overshadows these rosy outlooks. In a study published in April, consulting firm McKinsey now estimates that demand for semiconductors will drop by between 5% and 15% in 2020, compared to the previous year. Of the companies that will be affected the most, those that design chips for smartphones (Qualcomm, MediaTek) and cars (Infineon, NXP, STMicroelectronics) will certainly bear the brunt of the brutal drop in production and consumption. On 29 April, US company Qualcomm announced a 21% fall in demand during Q1 for its chips, which are used in most smartphones. It is predicting a 30% decline for the next three months. The same applies to NXP, which generates nearly 50% of its revenue from the automobile sector. In Q1, the Dutch company recorded a fall of 12% compared to the previous quarter. Here again, the company is expecting the worst, predicting a drop of between 14% and 23% of its revenue in Q2 compared to 2019.
"We just experienced two years' worth of digital transformation in two months"
Satya Nadella, CEO of Microsoft
“The coronavirus has impacted the entire value chain: production, with the closure of several factories, but also consumption,” said Frédéric Yoboué, analyst at Bryan, Garnier & Co. “During a health crisis, people are less inclined to buy gadgets.”
The Cloud blessed by the pandemic
However, not all companies are affected by the virus in the same way. Far from it, in fact. Some companies even seem to be benefiting from the crisis, such as those that equip cloud computing giants. “With the boom in homeworking, streaming platforms, e-commerce sites and all the dematerialised services, companies in the cloud computing space need to increase the capacities of their data centres,” said Julien Leegenhoek, tech stock analyst at Union Bancaire Privée. On 20 March, e-commerce giant Alibaba announced that it would be investing $28 billion in its cloud infrastructure over the next three years. The Chinese group justified its decision with the boom in homeworking since the start of the COVID-19 pandemic, which has led to a sharp increase in demand for dematerialised services. This is a godsend for memory manufacturers, such as Korean companies SK Hynix and Samsung Electronics, as well as server chip manufacturers (Intel, AMD). SK Hynix, for example, announced a 6% increase in revenue in Q1, reaching €5.4 billion.
Other cloud giants (such as Amazon Web Services, Google and Microsoft) are in the same situation as Alibaba. “We just experienced two years' worth of digital transformation in two months,” said Satya Nadella, CEO of Microsoft, on 29 April. In Q1, Microsoft's “intelligent cloud” activity, which includes its Azure platform for businesses, increased by 27% over one year, reaching $12.3 billion.
5G and autonomous vehicules
In the longer term, when the economy picks up again semiconductor sales are expected to generally recover. “The roll-out of 5G will drive the industry upwards,” said Yoboué. “Consumers will want to buy mobiles that are compatible with this new mobile network, which is ideal for semiconductor companies which make nearly 30% of their revenue from mobile phone brands.” This is especially true as 5G smartphones will require chips with higher added value and are therefore more expensive.
The other domain that is quite appealing to the semiconductor industry is cars, which in recent years have become quite reliant on electronic chips. Everything uses microprocessors now: from connecting the screens inside the vehicle to optimising battery consumption. “In 2019, the car market decreased by 5% and we’re not expecting a recovery in the short term. That said, vehicles contain an ever-increasing number of electronic chips,” said Hugo Paternoster. In 2018, the average value of chips used inside a car was $370 in a combustion model, compared to $820 for its 100% electric counterpart.
“Artificial intelligence opens a new market for chips that aren’t GPUs or CPUs"
Ondrej Burkacky, a semiconductor specialist at McKinsey
“Cars will go electric, and eventually autonomous, which is undoubtedly excellent news for the semiconductor industry,” said Julien Leegenhoek, tech equity analyst at Union Bancaire Privée. “Even if it seems far away, this future will indeed happen: cars will become electric and autonomous.” Experts are already predicting that the average value of chips used in autonomous vehicles will be nearly $2,000 per vehicle.
Artificial intelligence: the holy Grail
In order for vehicles to become autonomous, they need to increase their technological capacity with artificial intelligence (AI) – a sector that is a real gold mine for the semiconductor industry. According to IHS Markit, the prospects of electronic chips in artificial intelligence applications across all fields (information technology, health, cars, telecoms, industry, etc.) will likely triple in size over six years to reach $128.9 billion in 2025, compared to $42.8 billion in 2019.
US company Nvidia, which specialises in graphic processing units (GPUs), seems to be the best positioned to take advantage of this growing market, almost by chance. In fact, the company hadn’t particularly focused on AI. But in 2009, researchers at Stanford University had the idea to use GPUs for machine learning – a part of AI – rather than Intel processors (central processing units or CPUs). The result was quite successful.
Since then, the GPUs from Nvidia and its competitor AMD have been leaders in AI – an industry in which processors must handle large quantities of data. Moreover, Nvidia no longer calls its GPUs “Graphic Processing Units”, but rather “General Processing Units”. This marketing tactic indicates that its GPUs can now do everything and will eventually replace CPUs definitively.
Except that things aren't quite so simple. Initially developed to display video games, GPUs are imperfect champions of artificial intelligence, and many players are trying to develop new chip architecture specifically designed to meet the needs of AI. “Artificial intelligence opens a new market for chips that aren’t GPUs or CPUs,” said Ondrej Burkacky, a semiconductor specialist at McKinsey. “These are bespoke chips produced for this usage by companies like Google.” The Mountain View company has launched TPUs (tensor processing units) designed specifically for AI technology. And it is not the only one. Amazon and Facebook are also working on microprocessors dedicated specifically to machine learning, as are many start-ups. All hope to dethrone the traditional players.
To not get left behind, the traditional companies are willing to wield their chequebooks: in March 2019, Nvidia spent $6.9 billion to acquire Israeli start-up Mellanox Technologies. Intel, the leader in microprocessors, acquired Israeli start-up Habana Labs for $2 billion in December 2019. Habana Labs is barely three years old, but is already well positioned in the promising market of electronic chips optimised for artificial intelligence.