Semiconductor chips are the lynchpin of modern electronics and technology. But until we ran out of them in 2020 and it turned out we couldn’t make enough cars anymore (oops), not many people paid much attention to this crucial industry.
All that’s changed, and Peak readers know that semiconductors matter (especially if you’ve tried to get a car lately), so let’s take a deep dive into the subject and get smart fast about semiconductors.
Why it matters: Semiconductor chips are used in most sophisticated electronics, including computers, smartphones, cars, home appliances, and more.
- The importance of semiconductor chips became evident during the COVID-19 pandemic when chip production fell, impacting supply chains around the world and causing shortages of products that depend on chips to function.
- Auto production, for example, fell by X%, causing plant shutdowns that forced companies to lay off thousands of workers and boosting the price of used cars by almost 25%.
Get technical: That’s all fine and well, but what are semiconductors, anyway? A semiconductor is a material (often silicon) that conducts more electricity than insulators but less than conductors (hence the “semi”). Importantly, how they conduct electricity can be controlled by their design. That’s what makes them so useful for such a wide variety of electronic products.
- We call chips that use semiconductor material, like those found in computers and electronics, semiconductor chips.
- Each semiconductor chip consists of circuits printed onto “wafers” of silicon material.
Smaller is better: When it comes to chips, smaller is better. Chip manufacturers are constantly trying to make their products smaller and more powerful. The most advanced chips on the market today are made using what’s called a “5 nanometer” process.
- Apple’s uses 5 nanometer chips to power their newer Macbook and iPhone models.
- But things move fast in the semiconductor industry: 3 nanometer chips that 10-15x faster than 5 nanometer models are expected to hit the market in 2022.
The business angle: Most of the US$425 billion semiconductor chip industry is in Asia. 79% of the world’s chip production happened there in 2020, with 12% in the U.S.
One company, in particular, dominates advanced semiconductor chip manufacturing: Taiwan-based TSMC. In 2020 they produced 24% of the world’s chip supply and 92% of the most advanced chip models.
- Other major players in chip manufacturing include Samsung and Intel.
As chips have become more complex, the costs of manufacturing them have also grown. Building a manufacturing plant for advanced chips today costs at least US$10 billion and takes years. Even plants for less advanced chips still cost billions to set up, a capital expense that few companies can afford.
Zoom out: Rattled by pandemic-era chip shortages (and concerned about how potential conflict with China over Taiwan would disrupt production), governments in Western countries are now trying to bring chip manufacturing back on shore.
- The U.S. Senate is allocating $52 billion to create American-based chip plants and the European Union has made similar pledges, though without a clear price tag included.
- Canada was once home to a promising semiconductor industry based out of Ottawa, but it mostly collapsed during the dot-com bust.
Though success in spinning up this industry is far from assured: China has invested billions in building its own advanced chip manufacturing sector and, so far, failed.