Julian Beard
CFA, Senior portfolio manager, Thematic Equities

Digitization, autonomous driving, artificial intelligence – none of these happen without semiconductor chips. Advances in AI/machine learning capabilities doubled every 3.4 months between 2012 and 2019,1 in large part due to semiconductors. To facilitate this golden age of technology is going to require a lot of chips embedded in a huge array of devices.

While we all take the seamless use of our smart devices for granted, there is a hugely technological and heavily automated manufacturing process sitting behind the amazing little chips enabling the digital world of today.

"There are an estimated 40 billion connected devices in use today – roughly 5 for every person on the planet (7.8 billion people). In ten years, this number is expected to grow to 350 billion² – that’s 41 per person (assuming population growth to 8.5 billion)"³

What is a semiconductor?

A semiconductor chip (integrated circuit) is an electronic circuit built on a “semi-conducting” material. This material has an electrical conductivity that sits between a strong conductor (copper) and an insulator (rubber). Adding other elements allows the conductivity to be controlled.

It turns out that the best material for this is silicon, the second most abundant element in the earth’s crust (27.7%)4 and found in sand. Pure silicon ingots are sliced into wafers, on which the chips are developed. The name Silicon Valley derives from the pioneering work in semiconductors in the Santa Clara Valley, California.

Modern day semiconductors can trace their roots back to 1947 at Bell Labs, New Jersey, when Bardeen, Brattain and Shockley developed the transistor. In 1959, the transistor was “flattened” to create a “planar” manufacturing process, and in the same year, Kilby and Noyce developed an “integrated circuit” allowing multiple electronic components to operate on a single chip.5 These breakthroughs were the first steps in enabling mass production of integrated circuits.

From then to now

In 1964, the chip with the greatest “transistor density” carried just 64 transistors. In 2020, the iPhone 12’s A14 Bionic chip contains 11.8 billion transistors, in a chip just 88 mm2 in size.6 That is an astonishing amount of componentry in a space roughly the size of a fingernail, and there is a lot more to come.

Figure 1: More brainpower than ever is fueling the AIoT7 era

More brainpower than ever is fueling the AIoT era (1980-2030).
Sources: Used with kind permission of ASML (ASML, e-mail, [powerpoint], May 21, 2021)

More brainpower than ever is fueling the AIoT era (1980-2030).

How is this possible?

In 1965, Gordon Moore noticed that the number of transistors on the chips that Fairchild Semiconductor was building seemed to double roughly every two years.8 This rate of increase became known as Moore’s Law. It is central to the development of computational power. In essence, the industry is able to double the computational power per chip. To do this, all of the components shrink at each technology upgrade, or node as the industry calls it.

The node size has largely become a marketing feature but can be thought of as a guideline to the smallest feature size in the chip. In the early 1960s, chips were produced at the 50-micron node (0.000,05 meter). Chips in the recent iPhone12 were produced at the 5nanometer (nm, 0.000,000,005 meter) node. A transistor in this chip is about 25 atoms wide.9 Imagine the technological complexity in designing, producing, testing, and packaging these chips.

The factory floor: an automation playground

Semiconductor chips are made in fabrication plants, or “Fabs”. They are produced on silicon wafers. TSMC’s “GigaFABS” can produce over 100,000 300 mm diameter wafers per month.10 Remember our 88 mm2 A14 Bionic iPhone chip – a “GigaFAB” can produce 80 million per month. A production cycle takes about four months, which means there are 400,000 wafers in production at any time in the Fab. There are many steps to making the chip.

At all times data are flowing to the order controlling software. Here, in this automated world we can break things down and see in one minute how much automation is occurring. For example, every minute 2.31 wafers enter production and 240 process steps complete.

Figure 2: What happens in a Gigafab minute?

Pie-chart on what happens in a Gigafab minute (e.g. nearly 3,200 chips are ready for shipment)
Source: Based on Alan Weber, 08.10.2018. The Gigafab Minute and SEMI Standards: A Modern Miracle | SEMI

Pie-chart on what happens in a Gigafab minute (e.g. nearly 3,200 chips are ready for shipment).

What is the most important step?

The answer, of course, is every step is vital, but lithography holds the key to the technology nodes at 5nm and below. Broadly, the key steps in manufacturing are depositing layers of material onto the wafer, applying a photoresist, patterning the wafer with lithography, etching the chip features on the pattern, and implanting the silicon with additional chemical elements. There can be hundreds of process steps in the production of a chip.

Not only that, the internal layout and cleanliness of the building are vital. Even a particle of dust on the lens can be a catastrophe. It will destroy the pattern for hundreds of wafers, a very expensive mistake. For this reason, Fabs maintain extremely controlled environments with some of the highest standards of air quality, up to 10,000 times cleaner than the outside air.11

Lithography in semiconductors is somewhat akin to a (complex) photographic process. To pattern the wafer with the correct design a machine called a stepper exposes each individual die (chip) on the wafer to a flash of light through a mask. The mask is the negative image of all the components of the chip and the machine steps from die to die until the whole wafer is exposed.12 At the 7nm node, the process has become so complicated that it requires a new approach.

Extreme ultraviolet lithography (EUV) – the new approach

Figure 3: Example of an EUV Lithography machine

Photo: Example of an EUV Lithography machine
Source: ASML (2021): EUV lithography machines | ASML - Supplying the semiconductor industry; accessed on 16.06.2021

Example of an EUV Lithography machine.

Tiny droplets of tin shoot from a generator at 70 meters per second. Lasers flatten the droplet and vaporize it into a plasma which emits EUV light with wavelength of 13.5nm (UV light 365nm). This needs to happen 50,000 times per second to pattern the wafer.13 It has taken Dutch company ASML 20 years to bring this from concept to reality.

Figure 4: EUV TWINSCAN NXE: 3400C – some interesting facts

It costs around 120 million euro.

It has over 100,000 parts among which are 3,000 cables,40,000 bolts and 2 km of hosing.

The machine weighs 180,000 kilograms (that’s 140 Mini Coopers).

It’s equivalent to shining a light torch from Earth and hitting a 50 cent coin on the Moon.

Transporting 1 system takes 40 containers,20 trucks and 3 fully loaded 747s.

Interesting facts about EUV TWINSCAN NXE: 3400C (it costs around EUR 120 million, has more than 100,000 parts, weighs 180,000 kg etc.).

For the equipment ecosystem EUV opens up the need for new processes, new inspection tools, re-design of chip architecture and new materials. Clearly, scaling to 5 nm and below presents challenges but it is this culture of innovation and drive to keep Moore’s Law on track that has facilitated an amazing technological progression in semiconductors. The death of Moore’s Law has long been rumored. Nothing lasts forever, but EUV is going to keep things pointing in the right direction for the next decade and will lift the whole equipment ecosystem with it.

Semiconductor production: secular and strategic

…I realize there are questions about whether the unprecedented demand we are seeing today is secular or cyclical. When I listen to what our customers say, I hear a firm belief that the data economy is real and driving secular growth well into the future. This perspective is being reinforced by plans for substantial multiyear capital investments which are needed to support demand and fuel profitable growth...

May 20, 2021

Dan Durn, CFO of Applied Materials, Q1 2021 Investor Call

Figure 5: Top US exports in 2019


USD 125 bn

Refined oil

USD 94 bn

Crude oil

USD 65 bn


USD 48 bn


USD 46 bn

US top exports in 2019: aircraft USD 125 bn, refined oil USD 94 bn, crude oil USD 65 bn, automobiles USD 48 bn, semiconductors USD 46 bn.

Geopolitics – bring production and supply chains home

Semiconductors are a strategic asset. The US has the leading technology. It spends over 16% of semiconductor sales on research and development,14 more than any other country. Yet it has become dependent on production capacity in Asia. A recent FT15 report highlighted the US share of semiconductor manufacturing capacity fell from 37% in 1990 to 12% in 2020. At the same time, Europe declined from 44% to 9%.

Semiconductors and advanced packaging.

The United States is the birthplace of this technology and has always been a leader in semiconductor development. However, over the years it has underinvested in production — hurting its innovative edge — while other countries have learned from the US example and increased their investments in the industry.16

We should expect to see more government incentives to invest in manufacturing facilities. Building multiple facilities in many countries is not an efficient use of capital, but as the CEO of lithography equipment maker ASML said at the Q1 2021 earnings release "[...] well there is a beneficiary of capital inefficiency, and that’s us."¹⁷

It is not just about leading edge

One could be forgiven for thinking that the action is all concentrated in the design and production of leading-edge chips. However, “front end” improvements need mirroring elsewhere. In particular, there is an opportunity for the “back end” to add significant value to the process. The finished chips need packaging, in a way that allows them to maximize performance when installed in a device. This requires innovative packaging solutions. Further collaboration between leading front and back-end players is likely.

A recent example is Applied Materials joint venture with advanced packaging company BESI Semiconductor. Older nodes (28nm+) have a big role to play as demand for data gathering and analysis ramps. Hence, equipment demand is likely to have strong underlying support away from the latest and greatest developments. Automated testing is also an interesting space where Teradyne is a big player. Other adjacencies in semiconductors include Electronic Design Automation companies that provide the software used to design the chips.

A look to the future

The hunger for computational power is nowhere near the end. A mathematical model known as the Gompertz curve suggests that we are only in the infancy of silicon transistor production. This model predicts that the rate of growth of shipments of silicon transistors will continue to increase until 2038, not reaching saturation until 2050.18 Such models should be treated with caution, but they do serve to highlight that the industry still has a lot of room to grow.

A modern smart phone has about 100,000 times the processing power of the computer that navigated the Apollo missions to the moon.19 New applications breed innovation, new companies, and new solutions. We are at such a point, with major new applications likely to emerge from the age of digitization and data generation.

As an example, many software companies are adding, compute heavy, machine learning algorithms to give computers and robots the “intelligence” to analyze huge data sets, make useful predictions such as when a key component may fail, how to route energy in a grid or recognizing different items in a picking line.

In any real time application, like autonomous driving, there is no room for data delivery or system reaction delays. Hardware across the system needs a lot more computational power and memory. This challenges both logic chip and memory chip developers to come up with new solutions. Equipment to produce whatever new chips emerge will continue to attract investment.

Semiconductors are critical to developing technologies of tomorrow

Our conviction in the robotics and automation theme as a long-term investment opportunity is based on the fact that we see a rising tide of innovation, an increasingly varied range of use-cases and applications, and a large number of new ventures entering the market.

Semiconductors are a more mature market but one that is critical to the development of the technologies of tomorrow. They are a key building block in robotics and automation solutions, and they are themselves produced on highly sophisticated automated production equipment.

Demand is likely to increase over time as digitalization, artificial intelligence, autonomous driving, and the industrial internet of things become embedded into society. In addition, due to the strategic importance of semiconductors today, governments are lending their support to ensure that supply is available to them, by encouraging the geographic diversification of semiconductor production sites.

Semiconductor production equipment is already a fantastically advanced example of automated production systems. As the industry pushes further into complex structures at the atomic level, we expect to see greater innovation and the production of even more powerful chips.

About the author
  • Julian Beard

    CFA, Senior portfolio manager, Thematic Equities

    Julian Beard (BSc, CFA), Director, is a Senior Portfolio Manager for the Robotics strategy on the Thematic Equity team. In 2004, Julian joined the US Equity team at Credit Suisse Asset Management, now part of UBS Group, and later covered European equities and launched the Global Quality Growth equity mandate. He started his career in 1998 as an investment analyst at Scottish Life before joining the US equity team at Abbey National in 2001. He has developed considerable expertise in key sectors including technology, industrials, and financials. Julian holds a bachelor’s degree in Physics from the University of Edinburgh and is a CFA charterholder.

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