Semiconductors: Its An AI, EV, AV, IOT, VR, Robot, Drone World

 

“We’re just at the beginning of a transformation. Artificial intelligence is going to be similar to what the Internet was back in the ‘90s. You remember back in the ‘90s everybody said, ‘If you’re not going to be an internet company, you’re not going to be around.’ The same thing is going to be true. Almost every company you can think of, every application, it’s going to be affected by artificial intelligence. You’re going to be using artificial intelligence or you’re going to be outpaced by people who are.”

Brian Krzanich
CEO, Intel Corporation
2017 Analyst Meeting

For the semiconductor industry, the past 30 years have been very good to it. First came the explosion of PCs in the 1980s and early 1990s along with the laptop. Then came the cellular phone revolution followed by the internet revolution in the late 1990s. Then, as these products matured and long term growth looked bleak, slowing from 15%/year in the 1980s and 1990s to just 4% in the 2000s, along came the Cloud, which drove growth in the industry from 4% to 8% then to 10% or more. And now, it appears, just as the Cloud starts to mature over the next few years and growth once more appears in jeopardy, several new growth segments will rescue the industry from growing no faster than the auto or chemical industries. These new growth segments comprise an alphabet soup of areas such as AI, EV, VR, … While each area does not comprise a huge portion of the industry, given its vast scale and integration into every aspect of the economy, when combined, these new areas will provide significant growth over the next decade, enabling the industry to continue its growth.

To understand the need for massive new areas, one must understand the scale and scope of the industry. The industry will ship almost 400 billion Units in 2018 while revenue will approach $500 billion this year. The average ground up fab to produce semiconductors can cost $22 billion when fully outfitted. Thus, a small market cannot move the needle. Any new area must comprise a large novel application, such as Artificial Intelligence (AI), that can permeate throughout a large portion of the global economy, or a major industry transformation, such as Electric Vehicles (EV), that can replace the output of an entire existing global sector. If not of such scale, new applications will fail to accelerate growth.

Fortunately, for the semiconductor industry, a fortuitous convergence of these applications, which have been in development for over a decade, will produce a simultaneous rollout across several large scale sectors, underpinning real growth for the industry over the next decade. As a result, industry revenue growth accelerated over the past year as the following chart from the Semiconductor Industry Association demonstrates:

And while there was some inventory pipeline fill in 2017, the vast majority of the revenue represented real growth driven by continued Cloud rollouts and the early adoption of AI in select applications. AI revenue growth will compound at almost a 60% rate over the next five years, reaching $33 billion in 2022 from just $3 billion in 2017. And this revenue excludes the growth in fast memory chips that are needed to support the core AI chips by providing supporting fast data storage. These memory chips could easily equal or exceed the incremental revenue from AI chips.

Other new markets, such as Drones, will support rapid industry growth. Sales of Drones totaled less than $10 billion in 2017. But numerous industry projections show the Drone industry growing to over $70 billion by 2021. And while semiconductor industry content in the planes’ flying systems and controllers is limited, there is a significant amount of AI that will support the Drones in image recognition, response time, navigation systems, and autonomous capabilities. This will add to the demand for AI chips, as core industry demand projections noted above only includes Cloud applications. Virtual Reality (VR) and Augmented Reality (AR) represent another opportunity for rapid growth. From just 8 million units in 2017, the industry expects to ship 67 million in 2021, according to IDC. This 53% annual growth will support the growth of graphics chips, which dominate both VR/AR and AI. From the surreal world of VR to the very real world of the global auto market, the combination of EVs and Hybrids will add another nice niche to the industry. For a 48V Micro Hybrid, the additional power electronics are estimated at $450 per vehicle. For a full 200 mile range EV, the additional power electronics are estimated at $1,500 per vehicle. With 120 million cars estimated to be sold globally in 2025 and assuming just a 20% penetration of Hybrids and EVs, as electric batteries move down the cost curve and become competitive with the traditional engine, this market represents another $30 – $50 billion in annual semiconductor industry revenue by 2025. The Internet of Things (IOT) represents another nice growth market. The following chart demonstrates the projected explosive growth in connected devices:

Data courtesy of Statista.com

While not growing as quickly as VR/AR or AI, the Internet Of Things will grow from 20 billion connected devices in 2017 to over 30 billion in 2020. Should the semiconductor content just reach $10 per device, this market could represent almost an additional $10 billion in growth per year.

Altogether, these markets, plus others such as 5G, Autonomous Vehicles (AV), and devices with the potential for fixed broadband wireless, could easily add significant revenue to the industry, enabling it to sustain the types of growth exhibited over the past five years. And while not the 15% annual growth of the 1990s, it represents a sea change from the 4% growth of the 2000s. For the Semiconductor Industry, it is truly an AI, EV, AV, IOT, VR, Robot, Drone World. (Data from public companies, Statista.com, Semiconductor Industry Association, IDC, JP Morgan and Credit Suisse coupled with Green Drake Advisors analysis.)