Chip Industry Heads Toward $1T

The chip industry is on track to hit $1 trillion sometime over the next decade, and while the exact timing depends on a variety of factors, the trend line appears to be stable. The digitization of data, the digitalization of technology, and the expansion into new and existing markets, collectively are expected to drive chip industry growth for years to come.

Exactly when the IC world will top $1 trillion in revenue is contingent on a number of factors, from supply chain glitches to economic downturns. On the current track, the chip industry could hit that milestone as early as 2028. Last year, total revenue was about $600 billion, according to multiple reports. But that target also could slip by several years, as supply chain constraints and geopolitical forces add some temporary uncertainty into the mix. Nevertheless, more chips are being used everywhere, and growth is expected to continue — even if there are some hiccups along the way.

“If you take automotive, for example, we questioned what does the car in 2030 look like,” said Ondrej Burkackey, senior partner at McKinsey & Co., and one of the leaders of the firm’s Semiconductors and Business Technology practice. “We expect that silicon content per car is going to double by 2030. Any new functionality, such as driver-assistance features — it doesn’t have to be full autonomy — needs more semiconductors. Any electrification in the car needs more semiconductors compared to the conventional powertrain. But then, who is going to design the chip, and who is going to manufacture the chip? We’re seeing some changes in the value chain, where automotive OEMs are designing their own chips. And as a consequence of the chip shortage, we see some movements from OEMs to more direct buying, skipping some of the Tier 1s and Tier 2s that used to be part of that value chain.”

Automotive is just one of many segments undergoing these kinds of changes. The rollout of AI/ML nearly everywhere, as well as AR/VR, 5/6G, heterogeneous systems-in-package, and the replacement of SoCs with chiplets, will create new opportunities across a number of vertical markets, including some where chips have been used only sparingly in the past.

“The biggest chunk of the market is still computing and data storage,” Burkackey said. “Today, that’s roughly 40% of the industry. If you just grow it by 5%, which is our prediction, that will provide the biggest contribution to this additional $400 billion. The second largest segment, which is roughly 30% of the industry, is wireless communication. That is growing 5% to 6%, and it’s not so much driven by more content per phone, but by more devices in the middle segment. So when you look at the distribution of smart phones, it’s high-end, middle, and low-end. With emerging countries catching up on wealth, you will see a shift from the lower end toward more middle-market devices. Automotive is only about 8% of the industry today, but we expect it to grow to about 15%.”

Fig. 1: Global chip market by vertical, in $B. (Numbers are approximate). Source: McKinsey & Co.

Much of this growth is being fueled by new features and functionality. But more sensors everywhere, more convenience, and a push to improving efficiency, collectively are generating a flood of data that needs to be processed.

“You have to have more efficiency because all of us are dealing with a complete data overload,” said Mark Papermaster, CTO of AMD, in a recent presentation. “If you go back just four or five years ago, data was app-generated. It was generated by a person retrieving data. You’re taking photos. You have manufacturing operators creating data, and with business transactions you’re entering data. This is data taken by humans for specific analysis. That’s the way data generation used to be. But it’s all changed. The vast amount of data that we’re processing today is automatically generated. There are cameras everywhere, smart cities, data collected during manufacturing processes, design processes. It’s mass-generated. And at home, the Internet of Things has embedded smart devices everywhere in our lives.”

Pandemic changes
COVID lockdowns and work-from-home drove a sales boom in consumer electronics and computer peripherals in the second half of 2021. While analysts say some segments are softening as workers return to offices, the overall market for chips is still going strong. Chip shortages continue across many sectors, and demand continues to rise globally.

But there also are significant changes on the infrastructure side. Chipmakers are getting more information these days about how their chips are being used by end customers, and they are building more flexibility into chip architectures to allow one design to serve multiple end markets.

“COVID has changed a lot of things,” said Sailesh Chittipeddi, executive vice president at Renesas. “One is the level of transparency with end customers versus ODMs has changed, and it’s changed for good. Now we have more visibility into what we can build for them. In the past, we were dealing with people in between. Now we’re dealing with a much higher level, just by virtue of the fact that they need the capacity. They don’t believe what the people in between are telling them. It’s the same for automotive. Second, there is this whole notion of making the user experience a lot better than it has been in the past. And third, we’ve created a ‘lab on the cloud,’ so basically our customers are able to go in and validate their devices on the cloud.”

This “sandbox” type of approach is just one of many changes. Chipmakers also have adapted to shifting demands and changing market dynamics by focusing on platforms and solutions rather than highly customized, one-off chips. That limits their exposure to individual market sector ups and downs, adding flexibility in terms of how the chips are used and where they are used.

“We look at creating chip solutions, making sure that chips have capabilities that can be used in different applications,” said Thomas Rosteck, Connected Secure Systems Division president at Infineon. “So you can adjust it with the help of software, for example, to make sure that it works in a certain way, or combine it with other things. For example, our microcontrollers provide capabilities that our Industrial Power Control Division can then use for power devices. So if you think about this in terms of a washing machine, in the past it basically switched on and off. Now it figures out how big a load you have, and it adjusts its behavior based on that sensing. We’re moving from just a chip view to a sub-component or system view.”

Put simply, chipmakers are figuring out ways to provide domain-specific solutions while still developing chips that can be used across multiple market segments. As a result, balance sheets will likely be more consistent than in the past, and demand will remain strong overall even if one sector softens. Chiplets are another example of how this can be deployed.

But all of these strategies also can exacerbate shortages in materials, manufacturing capacity, and talent, and each of these shortages can have waterfall effects. For example, because equipment makers use lower volumes of chips, they are typically not at the top of the foundry priority list. Nevertheless those chips are required in the equipment used to make other chips, and ultimately they have an outsized impact on shortages.

“Despite previously mentioned tightness and challenges, we have seen remarkably strong equipment units for the past year, with that equipment surpassing the $100 billion mark in 2021 and almost doubling in size over the past five years,” said Inna Skvortsova, an analyst at SEMI, in a recent presentation. “One of the ironies is that the global semiconductor shortage is now hitting chip makers and leading to longer lead times for equipment needed to manufacture chips. Collectively, to address this global shortage, it is critical to ensure allocation of chips needed to manufacture chips in order to increase the capacity. One chip allocated to an equipment maker may result in 100,000 chips manufactured for other markets.”

Future growth
Most market analysts expect the capacity shortages to ease over the next couple years, and for markets to settle down from pandemic-related disruptions. That should help propel the underlying push toward digitization, while digitalization will continue to drive demand across new and existing market segments.

“Looking at the current chip shortage, it’s actually not happening at the leading edge,” said McKinsey’s Burkackey. “It’s happening at 45 to 65 nanometers. And we potentially see a shortage at 90-plus nanometers. If you look at 5G, the difference between a 4G phone and 5G phone when it comes to the most advanced processing nodes is almost none. But it has a lot more radio frequency bands to provide you with bandwidth, which is roughly 20% more silicon. But that silicon doesn’t come from 7 or 5nm. It comes from 90nm. The growth across the industry sits on a much broader base, and it’s an indication that the growth is real and it has a quite stable foundation.”

Assuming capacity can be ramped quickly, and geopolitical tensions remain in check, that growth could explode at any time and easily surpass the $1 trillion mark. But there are still a lot of unknowns, and it’s impossible to pinpoint the “when” even if the factors that make up the “why” appear well-grounded.

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