By Judah Esses
The semiconductor industry powers much of the world’s technology, from making it possible for loved ones to talk face-to-face from across an ocean to executing millions of trades in the market every day. However, “over the last 15-20 years, the semiconductor industry has recorded growth at an annualized rate of less than 5%.” With this lack of growth and the increase in chip production prices, the industry has been quiet. But, due to the coronavirus, which has brought a shift to the cloud and increased the number of people working from home, the demand for chips has skyrocketed. This sudden catalyst has led to sudden competition in the industry, and in such an unstable economic environment, these companies need to be competitive. This has led to a huge influx of mergers and acquisitions over the past year, which has helped companies increase market share, reduce costs, and boost productivity.
Over the last year, the industry has recorded more than thirty mergers and acquisitions — the two largest deals combined for a value of more than $60 billion. In July, Analog Devices (ADI) agreed to acquire Maxim Integrated Products (MXIM) in a deal worth $20.9 billion. In September, Nvidia (NVDA) agreed to buy the U.K.-based Arm Holdings in a deal valued at $40 billion. Although there was a pause in the action as the coronavirus lingered through the streets, it didn’t take long for people to realize that there was a lot of debt available for companies to borrow, and the interest rates were low. This recognition is what partly led to a buzz in the industry despite the pandemic’s negative effects on the economy. As these mergers and acquisitions occur, we see consolidation. This helps the smaller firms who are struggling with rising costs for designing. Also, packaging and testing are becoming unaffordable for most companies, especially for the smaller firms who have not achieved economies of scale yet. Furthermore, the industry’s consolidation is also benefiting the larger firms by cutting costs and becoming more diverse in their services.
Although the forecast for the semiconductor industry seems bright, there is a red flag. China is pushing the world to avoid doing business with Taiwan, and semiconductor production is dangerously dependent on Taiwan. According to Jan-Peter Kleinhans, director of the technology and geopolitics project at Berlin-based think tank Stiftung Neue Verantwortung, “By dominating the U.S.-developed model of outsourcing chip manufacture, Taiwan ‘is potentially the most critical single point of failure in the entire semiconductor value chain.’” The biggest semiconductor production company in the world is the Taiwan Semiconductor Manufacturing Company (TSMC). With TSMC being a dominant manufacturer in terms of both market share and production capabilities, any disruption would cause a ripple in the industry. Thus, as the Biden Administration settles in, it is critical for the industry that they take a tough stance on China’s agenda with Taiwan.
Because of the demand for chips due to the pandemic, many are skeptical of what the semiconductor industry will look like as things go back to normal. Although the need for chips may not be as high, the industry still has room to grow. However, it will grow differently than it had in the past. Instead of solely focusing on chip production, semiconductors can now shift their focus to software, chip, and eventually brand themselves as a systems company. A great example of this is Nvidia. Instead of merely focusing on building chips, they have become one of the world’s leading systems companies. If other large companies take advantage of their market share in the industry, they can be heading in Nvidia’s direction.
All in all, the industry has started to pick up again, and there is a lot of room for growth now that companies are taking advantage of the current situation. Nonetheless, it is important to keep the situation with China and Taiwan in mind because it can have a major effect on the industry. After a record year of mergers and acquisitions, I think we can expect to see similar numbers as the industry consolidates. As a result, the more prominent names will branch out and offer more diverse products. Overall, although it is an industry that has been lacking growth, the world is a very different place than it was last year, and this has woken up the semiconductor industry once again.