https://www.economist.com/business/2021/01/23/chipmaking-is-being-redesigned-effects-will-be-far-reaching

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[20210123_WBD002_1]

A new architecture
Chipmaking is being redesigned. Effects will be far-reaching

The global semiconductor business is becoming at once more diverse
and more concentrated. This brings opportunities--and risks

BusinessJan 23rd 2021 edition
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Jan 23rd 2021

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ON JANUARY 13TH Honda, a Japanese carmaker, said it had to shut its
factory in Swindon, a town in southern England, for a while. Not
because of Brexit, or workers sick with covid-19. The reason was a
shortage of microchips. Other car firms are suffering, too.
Volkswagen, which produces more vehicles than any other firm, has
said it will make 100,000 fewer this quarter as a result. Like just
about everything else these days--from banks to combine
harvesters--cars cannot run without computers.

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The chipmaking industry is booming. The market capitalisation of the
world's listed semiconductor firms now exceeds $4trn, four times what
they were worth five years ago (see chart 1). Chipmakers' share
prices have surged during the covid-19 pandemic, as work moved online
and consumers turned to streaming and video games for succour.

This has propelled a wave of dealmaking. In September Nvidia, which
designs powerful chips for gaming and artificial intelligence (AI),
said it would buy Arm, a Britain-based company whose blueprints are
used in nearly all smartphones, for $40bn. In October AMD, which
makes blueprints for graphics and general-purpose chips, announced
another megadeal--to acquire Xilinx, a maker of reprogrammable chips,
for $35bn.

Silicon splurge

Capital spending, too, is rising. Samsung, a South Korean
conglomerate, wants to invest more than $100bn over ten years in its
chip business (although some of that will go to its memory chips used
in things like flash drives rather than microprocessors). On January
14th Taiwan Semiconductor Manufacturing Company (TSMC)--which turns
blueprints into silicon on behalf of firms like AMD and
Nvidia--stunned markets when it increased its planned capital spending
for 2021 from $17.2bn to as much as $28bn, in anticipation of strong
demand. That is one of the largest budgets of any private firm in the
world.

[20210123_W]

All this is happening amid a confluence of big trends that are
realigning chipmaking. At one end the industry is a hive of
competition and innovation. Established chip designs, including those
from AMD, Nvidia and Intel, the world's biggest chipmaker by revenue,
are being challenged by new creations. Web giants such as Amazon and
Google, big customers of the incumbents, are cooking up their own
designs. They are joined by a gaggle of startups, eager to capitalise
on demand for hardware tuned for the needs of AI, networking or other
specialist applications.

All this would be unequivocally great news for everyone, were it not
for what is happening at the other end--in the factories where those
designs are turned into electronic circuits etched on shards of
silicon. The ballooning costs of keeping up with advancing technology
mean that the explosion of chip designs is being funnelled through a
shrinking number of companies capable of actually manufacturing them
(see chart 2). Only three firms in the world are able to make
advanced processors: Intel, TSMC, whose home is an earthquake-prone
island which China claims as its territory, and Samsung of South
Korea, with a nuclear-armed despotic neighbour to the north. The
Semiconductor Industry Association, an American trade body, reckons
that 80% of global chipmaking capacity now resides in Asia.

The vanguard may soon be down to two. Intel, which has pushed the
industry's cutting edge for 30 years, has stumbled. On January 18th
news reports suggested that the company (which was due to report its
latest quarterly results on January 21st, after The Economist went to
press) may begin outsourcing some of its own production to TSMC,
which has overtaken it.

And the world economy's foundational industry looks poised to
polarise further, into ever greater effervescence in design and ever
more concentrated production. This new architecture has far-reaching
consequences for chipmakers and their customers--which, in this day
and age, includes virtually everyone.

Start with the diversification. For years technology companies bought
chips off the shelf. In its 44-year history Apple has procured
microprocessors for its desktops and laptops from MOS Technology,
Motorola, IBM, and finally Intel. Soon after the launch of the
original iPhone in 2007, however, the firm decided to go it alone.
Later iterations of the smartphone employed its own designs,
manufactured first by Samsung, and later by TSMC. That approach
proved so successful that in 2020 Apple announced that it would
replace Intel's products with tailor-made ones in its immobile Mac
computers, too.

Two years earlier Amazon Web Services, the e-commerce giant's
cloud-computing unit, began replacing some Intel chips in its data
centres with its own "Graviton" designs. Amazon claims its chips are
up to 40% more cost-efficient than Intel's. Around the same time
Google began offering its custom "Tensor Processing Unit" chip,
designed to boost AI calculations, to its cloud clients. Baidu, a
Chinese search giant, claims its "Kunlun" AI chips outpace offerings
from Nvidia. Microsoft, the third member of the Western
cloud-computing triumvirate, is rumoured to be working on chip
designs of its own.

Clever startups in the field are securing billion-dollar valuations.
Cerebras, an American firm which designs AI chips, has earned one of
$1.2bn. A British rival called Graphcore, which has been working with
Microsoft, was valued at $2.8bn in December. On January 13th
Qualcomm, a firm best-known for its smartphone chips, paid $1.4bn for
Nuvia, a startup staffed by veterans of Apple's in-house chip-design
team.

Custom silicon was an iffy proposition a decade ago. General-purpose
chips were getting better quickly thanks to Moore's law, which holds
that the number of components that can be crammed into a silicon chip
should double every two years or so. Today the Moorean metronome is
breaking down, as quirks of fundamental physics interfere with
components measured in nanometres (billionths of a metre). Each tick
now takes closer to three years than two, notes Linley Gwennap, who
runs the Linley Group, a research firm, and offers fewer benefits
than it used to.

That makes tweaking designs to eke out performance gains more
attractive, especially for big, vertically integrated firms. No one
knows better than Apple exactly how its chips will interact with the
rest of an iPhone's hardware and software. Cloud-computing giants
have reams of data about exactly how their hardware is used, and can
tweak their designs to match.

And whereas designing your own chips once meant having to make them
as well, that is no longer true. These days most designers outsource
the manufacturing process to specialists such as TSMC or
GlobalFoundries, an American firm. Removing the need to own factories
cuts costs drastically. A raft of automated tools smooths the
process. "It's not quite as simple as designing a custom T-shirt on
Etsy," says Macolm Penn, who runs Future Horizons, another
chip-industry analyst. But it isn't a world away, either.

[20210123_W]

Although designing chips is now easier than ever, making them has
never been harder. Keeping up with Moore's law, even as it slows,
requires spending vast--and growing--sums on factories stuffed with
ultra-advanced equipment: plasma-etching kit, vapour-deposition
devices and 180-tonne lithography machines the size of a
double-decker bus. After falling as a proportion of overall revenue,
the chip industry's capital spending is ticking up again (see chart
3). In absolute terms, the cost of high-tech "fabs", as chip
factories are known, has grown relentlessly--with no end in sight.

Today's state-of-the-art is five-nanometre chips (though "5nm" no
longer refers to the actual size of transistors as earlier
generations did). Both Samsung and TSMC began churning them out in
2020. Their 3nm successors are due in 2022, with 2nm pencilled in a
few years later.

Intel outside

At the turn of the millennium, a cutting-edge factory might have cost
$1bn. A report in 2011 from McKinsey, a firm of management
consultants, put the typical cost of an advanced fab at $3bn-4bn.
More recently, TSMC's 3nm factory, completed in 2020, in southern
Taiwan, cost $19.5bn. The firm is already pondering another for 2nm
chips, which will almost certainly be more. Intel's stumbles have
left it marooned at 10nm--and its boss, Bob Swan, out of a job. His
incoming replacement, Pat Gelsinger, will need to decide if the
company, which, unlike TSMC, also designs its chips, wants to keep
making them. Potential new entrants face enormous barriers to entry.
The economics of fabs pushes these up higher with every technological
advance.

That matters. Not all chipmaking requires cutting-edge technology.
Cars mostly use older, duller semiconductors. Miniaturisation may
seem less of an imperative in roomy data centres. But it is crucial:
there are some computations that only the most powerful chips can
tackle.

And demand for these is likely to grow as silicon infuses products
from thermostats to tractors in the uber-connected "Internet of
Things". Between them TSMC and Samsung customers are already a "Who's
Who" of big tech--Apple, Amazon, Google, Nvidia, Qualcomm (and soon,
if the news reports are true, Intel itself). As things like cars
become more computerised and go electric (see article), the chips
that go into them will become more advanced, too. Tesla, an American
maker of electric cars, already relies on TSMC's 7nm fabs to make its
in-house self-driving chips.

Asia's nanoscale duopoly remains fiercely competitive, as Samsung and
TSMC keep each other on their toes. The Taiwanese firm's operating
margins have been more or less steady since 2005, when 15 other firms
were operating at the cutting edge. But the logical endpoint of the
relentless rise in manufacturing costs is that, at some point, one
company, in all likelihood TSMC, could be the last advanced fab
standing. For years, says an industry veteran, tech bosses mostly
ignored the problem in the hope it would go away. It has not.

Those worries are sharpened by the industry's growing political
importance. As part of its economic war against China, America has
sought to deny Chinese firms the ability to build leading-edge chip
factories of their own. China has put semiconductors at the core of a
multibillion-dollar plan to become self-sufficient in critical
technologies by 2025--especially now that American sanctions have
deprived it of some foreign imports.

The structural forces behind increased concentration are here to
stay. America, worried about losing access to the most advanced
factories, has given handouts to TSMC in return for a fab in Arizona.
Samsung may expand the one it runs in Texas. Another package of
subsidies and incentives is awaiting funding from Congress. The
European Union, which has pockets of high technology in Belgium and
the Netherlands, wants more of them. In December 17 EU countries
agreed to spend tens of billions in post-pandemic stimulus cash to
try to create leading-edge factories by the middle of the decade. The
chip industry's history suggests these sums will only get more
eye-watering with time. #

This article appeared in the Business section of the print edition
under the headline "A new architecture"

Reuse this contentThe Trust Project

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