As many of our high tech and consumer electronics supply chain readers are aware, there has been a wave of consolidation occurring across semiconductor industry sectors.  The reasons are many. They include making bets on the next generation of chip technology that will drive specific industry applications such as artificial intelligence, autonomous driving and Internet of Things. Of late, acquisitions have also focused on the mitigating the rather expensive cost of investing in the next generation of chip technology as well as leveraging the influence and investment in semiconductor design and foundry capacity. This ongoing consolidation not only impacts high-tech product value chains, but other key industries as well.

A reminder of this implication of such trends has come from contract semiconductor chip fabrication producer Taiwan Semiconductor Manufacturing Company (TSMC). The “fab” chipmaker has recently announced plans to build a $15.7 billion new design and fabrication facility that would produce the world’s most advanced 5-nanometer and 3nm chips.

A recent published report from Nekkei Asia Review observes that Apple currently utilizes TSMC’s 16nm process technology for core processor chips utilized in the iPhone7. TSMC will begin producing 10nm processor chips in 2017, and with this new investment, could conceivably produce 3nm chips as early as 2022.

The report further observes that only premium tech players with deep pockets such as Apple, Huawei, Qualcomm, Media Tek and Nvidia can afford investments in these next generation chip technologies.  According to the Nekkei report, TSMC’s most dominant customers are Apple and Qualcomm, each accounting for 16 percent of the company’s revenue. In late October, Qualcomm announced its intent to acquire NXP Semiconductors, a major supplier of semiconductor chips and microprocessors that control more sophisticated automobile functions in power management, security access, media, and audio functions. Qualcomm is paying a hefty sum, upwards of $39 billion, to enter automotive technology value-chain needs. The announcement represented one of the largest semiconductor related acquisitions to-date. Industry speculation is that Qualcomm will turn to TSMC for 7nm chips which are scheduled for production sometime in 2018.

Further, more and more fabrication capacity is being consolidated around just a few “fab” owners. The report notes that TSMC current accounts for 55 percent share of global fabrication production needs, which by any standard points to growing market dominance. Other fabrication players that make-up the bulk of industry needs are Intel and Samsung, and to some extent Global Foundries which acquired the Former IBM microelectronics and semiconductor business unit.

Intel indicates it will begin producing 10nm chips in late 2017 while Samsung plans to introduce 7nm chips by the end of 2018.

Thus, the most critical link for high tech and consumer electronics supply chains is indeed semiconductor design and manufacturing capability, and forces are accelerating toward consolidation of the major players. More and more, the required investments in the next breakthrough in technology are becoming far more expensive and will require bigger and more deep pocketed players willing to make such bets.

The race is indeed about major control of not only the high-tech product value-chain, but increasingly key levers of automotive and equipment manufacturing value chains as well. Tesla Motors is already demonstrating the dominance of high technology components in the production and operation of electrically powered vehicles.

In today’s multi-industry environment of short-term focused investor value, not a lot of industries can tolerate a $16 billion bet on a new technology and production capability. Sharing the investment risk among fabless designers and fabrication producers is a practice increasingly being consolidated among key players.

Bob Ferrari

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