Imagine a world without chips
Semiconductors, or chips, are a much sought-after product, both in our daily lives and on the stock market. Today, we cannot imagine a world without computer chips. The Semiconductor Industry Association (SIA) says that the global chip market will grow by 16% to 611 billion dollars in 2024, making the semiconductor industry one of the fastest-growing industries that is driven by the ongoing digitalisation of almost everything around us.
Without chips, there would be no digital world. In fact, the emergence of generative artificial intelligence (AI) has marked a new era. Computer chips are becoming more and more advanced and the number of digital possibilities is still on the rise.
Joris Franck, Thematic Portfolio Manager KBC Asset Management
Chips, also known as semiconductors, control digital processes and provide computing power and memory. Without chips, there would be no smartphones, laptops or game consoles and no cars or medical equipment. There would be no electric toothbrushes or washing machines, either. “Chips are everywhere”, says Joris Franck, Thematic Portfolio Manager at KBC Asset Management. “The average person owns 150 chips. A smartphone contains dozens of chips while a car has 300 of them, and you can add as many as 3 000 chips to your total count if you drive an electric vehicle. Not every application requires highly complex chips. It goes without saying that the chips in your smartphone are more sophisticated than those in a smart LED bulb. But whichever way you look at it, demand for chips is huge – and that’s creating opportunities.”
Smaller, better, faster: the race for cutting-edge chip dominance
So what exactly is a computer chip? “It’s a rather complex device”, says Franck. “A computer chip is a small piece of semiconducting material – silicon – with a tremendous number of microscopic electronic circuits on it. There are several types of chips. Analogue chips, for instance, process physical information such as temperature, speed, light or sound. Digital chips, by contrast, don’t process analogue information but rather the well-known ones and zeroes we call bits.”
The most advanced chips today contain more than 50 billion circuits, far more than the thousands of circuits printed on them 50 years ago. The more circuits, the larger the computing power – and that’s what it’s all about.
Joris Franck, Thematic Portfolio Manager KBC Asset Management
Chip manufacturers are constrained by the laws of physics, as the number of circuits on a chip keeps increasing exponentially. Gordon Moore, one of the founders of Intel, translated this into a law. “Moore’s law dictates that the number of transistors or circuits doubles every two years”, Franck clarifies. “Chips are constantly becoming more powerful and the circuits keep getting smaller. These days, the circuits on state-of-the-art chips are microscopic, measuring just a few nanometres – and 1 millimetre equals no fewer than 1 million nanometres.”
Chips production is an extremely complex – and therefore expensive – process, requiring specialist knowledge and expertise. “Twenty years ago, well over ten different companies were able to manufacture the most cutting-edge chips at that time”, says Franck. “This has completely changed.”
The production of the most advanced chips has turned into a knock-out contest. Complexity increases with every new generation of chips, as does the cost of manufacture. Not every company is able to recover the costs incurred.
Joris Franck, Thematic Portfolio Manager KBC Asset Management
A factory that is able to produce state-of-the-art chips easily requires an investment of more than 15 billion euros. The price of the cutting-edge machinery of Dutch company ASML, for example, hovers around 300 million euros. Anyone intending to produce these chips in bulk will obviously need more than one machine. “Today, there’s basically one company that is able to produce the most advanced chips, which are currently 2 nanometres wide. That’s Taiwan Semiconductor Manufacturing Company (TSMC)”, says Franck. “South Korean company Samsung comes close. US company Intel follows at some distance, although it has made plans to catch up. The question is whether Intel will succeed.”
Graphic chips: the gamers’ choice, the key to the AI revolution
There are two types of digital chips: memory chips and logic chips. “Memory chips like Samsung’s store information, like an USB stick in your laptop”, says Franck. “Logic chips, by contrast, are your laptop’s brain.” The best-known logic chip is the Central Processing Unit (CPU). “Every owner of a Windows laptop will recognise the Intel or AMD sticker on their laptop”, Franck adds. “Apple, too, produces CPUs for their iPhone, iPad and MacBook.”
“A CPU is a solid all-round processor that is able to adequately carry out most tasks. But outsourcing some sub-tasks to an ‘accelerator chip’ proved very efficient”, Franck notes. “The best-known accelerator chip is the Graphics Processing Unit (GPU), designed by Nvidia or AMD and produced by TSMC.” Unlike the CPU, the GPU controls the graphics. A GPU is perfect for games but also for other heavy-duty graphics tasks, such as video editing and 3D rendering.
“Nvidia discovered that GPUs were also very capable of performing general processing tasks”, says Franck. “Their CUDA software made it possible to program the graphics chips for other purposes, making GPUs an interesting supercomputing solution in science. And that’s when AI was born… Nvidia realised that tremendous computing power could be obtained by connecting a large number of GPUs. This also prompted the emergence of generative AI, precisely because a huge amount of computing power is needed to train Large Language Models. Nvidia’s switch to AI turned out to be a profitable endeavour. Nvidia has now become the world’s most valuable chip company for the very reason it started focusing on AI.”
Companies that invest in AI research and development play a key role in developing the advanced chip market. A new wave of innovation and the corresponding economic opportunities is at hand.
Joris Franck, Thematic Portfolio Manager KBC Asset Management
Numerous AI data centres are now being built and existing data centres are being converted into AI data centres”, Franck adds. “They’re all packed with connected GPU’s. Nvidia’s virtual monopoly over these GPUs, which allows it to dictate prices with little room for negotiation, is a bone of contention with its customers. Most of Nvidia’s customers, such as US big tech companies like Alphabet, Amazon or Microsoft, have started to design their own GPUs, and TSMC produces them. These chips may not perform as well as Nvidia’s, but these companies are hoping to reduce the overall cost of the computing power needed for their AI applications in the future.
The appetite for chips offers opportunities for investors
Although the future direction of new technologies remains uncertain and does not guarantee success, investors may benefit from potentially revolutionary developments by investing in the chip industry. “Investing in chips offers opportunities for investors, but subject-matter knowledge is essential for well- considered decisions”, Franck stresses. “No one can predict the prices of shares. Investing always comes with a risk. The semiconductor industry can be quite volatile over shorter periods of time, as chips production is a global matter that relies on a highly complex supply chain involving interdependencies. This production chain as a whole is quite long and comprises more links than we might expect: from chip design through chip manufacturing – including chip manufacturing equipment suppliers – to assembly and packaging.”
Everybody agrees that the digital transformation is changing the world and the way we live our lives. Chips are a crucial part of this transformation. The pace of global digitalisation is also accelerating. From this perspective, long- term prospects for the semiconductor market remain highly favourable. “Its proven economic and geostrategic importance makes the semiconductor an interesting investment”, Franck concludes.
We’ve become extremely dependent on chips. Although the semiconductor sector is highly cyclical, the increase in the number of end markets is gradually reducing this cyclicity. Chips are shaping the future. They are and will remain vital for the functioning of the global economy, making them an interesting option for investors.
Joris Franck, Thematic Portfolio Manager KBC Asset Management
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This article is informational only and should not be considered investment advice.
