By: Julia Milani
The technology bubble is a trillion-dollar sphere in the stock market that has shown no signs of slowing down. People have been riding high on the wave of giants like Apple, Samsung, and Meta, heralding an era of unprecedented market enthusiasm. However, a paradigm shift is underway, subtly yet significantly altering the market's landscape. Semiconductor companies have played a back-burner role in the stock market but are now stepping into a spotlight of their own. A semiconductor is a material that acts as a go-between for a conductor and an insulator and is used to manage the flow of electricity in everything from smartphones to household refrigerators. As the commercialization of artificial intelligence (AI) and the vast expanse of the tech world have become more available to the average person, the demand for these chips has surged.
Taiwan Semiconductor Manufacturing Company (TSMC) is currently the twelfth most valuable company in the world and produces 92% of the most advanced microprocessing chips. TSMC was founded by Morris Chang, whose career started at Texas Instruments, and in a visionary move, co-founded TSMC in tandem with the Taiwanese government. They manufacture the most efficient chip in the market—the smallest chip with the most energy in the shortest amount of time. Over the years, TSMC has perfected their chips for a lightweight design that can be integrated into numerous devices, from the most compact pieces of technology to heavy duty military equipment. This product has allowed them to be far ahead of their competitors, who struggle to match the company's pace in meeting the soaring demand for these essential components of modern technology.
As demand and interest in publicly available AI increase, Nvidia stands at the forefront of the field, spearheading the development with its targeted investment in an AI-specific semiconductor chip. The Santa Clara company, worth about $940 billion according to the Washington Post, made the majority of its profits by supplying computer graphics cards to gaming companies and computer assembly companies. These cards are essentially printed circuit boards that hold RAM, processors, and other components vital for optimising computer performance. Nowadays, their sophistication has reached a point where they virtually mimic computers in their own right. Several years ago, however, NVIDIA's trajectory took a notable turn when they employed AI researchers to use basic computer graphics cards to test out the earliest versions of ChatGPT. This budding research, coupled with their pledge to perfect a microprocessor adaptable for AI technology, has skyrocketed their stock to a peak of $483.35, with no projected signs of plateauing anytime soon.
No company, however, has settled into their cornerstone in the market quite as well as ASML Holding Company. ASML has perfected the refined technique of using extreme ultraviolet (EUV) light to etch intricate patterns onto silicon wafers, a foundational step in microprocessor fabrication. Microprocessors are composed of dozens of thin layers of silicon wafers and with a process known as lithography, these wafers have transistors etched into them. These transistors serve as the microprocessor's command centre, dictating its functionality and power regulation. With the physical chips getting smaller, the need for a finer 'pencil' to etch these transistors becomes even more paramount— this is where ASML comes in. They've found a way to use extreme ultraviolet light (EUV), with a wavelength of 13.5 nano meters to make these patterns exceptionally small, thereby enhancing the chip's efficiency and capability. They've managed to hold a monopoly over the niche market, significantly bolstering its financial standing. The complexity of this technology, coupled with the staggering $200 million price tag per machine and the logistical challenges involved in its transportation— often requiring multiple airplanes— has sent ASML's profits soaring, solidifying its status as an unrivalled titan in the semiconductor industry.
These major companies are at the forefront of their fields because of the years of relentless technological innovation, underpinned by robust research frameworks, highly skilled teams, and advanced software infrastructures. This has allowed them to effectively monopolise the field. Despite this, the allure of the semiconductor industry, with its lucrative prospects, continues to beckon new players in the field. .
What dissuades competitors is the $20 billion price tag on the production factories involved in creating the microprocessors. These factories, often taking years to build, mean companies interested would have to spend money to make money. And while they are spending money to build factories, established companies continue to funnel their resources into cutting-edge technological advancements. Beyond the sheer capital expenditure of factory construction, well-established companies such as Nvidia and ASML Holding can leverage economies of scale to keep their price tags lower than potential competitors, thereby enabling them to strategically undercut potential competitors on pricing. With their machinery and facilities long since amortised, these major players are in a position to maintain competitively low prices for their chips. This economic dynamic serves to fortify their market dominance, creating a high financial threshold that challengers must surmount to gain a foothold in this lucrative yet capital-intensive industry.
Another hesitation in the investment of new companies is due to supply chain issues. Many technology companies are still facing long waiting times when it comes to materials for research and construction as a result of the pandemic and lasting trade disputes. With new companies being unable to obtain these materials for R&D, investing a copious amount of time and effort into a new sector for a company seems like a waste of money. Not only would it not be viable for the companies, it would also sink investor money into a risk-filled asset. Established semiconductor companies are not facing the same supply chain issues due to an established supply chain that has its ways around the disputed routes, as they have been working around them since they first became an issue.
The companies that undertake chip fabrication in-house often find themselves entangled in a web of outsourcing. For example, companies like Apple and Intel can produce parts of the chips but have to outsource the construction, as the push for newer, sleeker handheld devices has posed problems for in-house assembly. This outsourcing for thinner chips has allowed the bigger companies to firmly maintain elitist status in the semiconductor world.
Industry titans such as ASML, Nvidia, and TSMC have hedged their bets in favour of the tech boom leaning their way. With them firmly out of reach of any possibility of competition, their wait for consumer demand to catch up to their technology has finally paid off. And even without improving their chips or increasing their demand, they're still looking at millions of dollars worth of income, effectively outpacing potential rivals.
However, if left unchecked, they have the power to directly raise the price of microprocessors, as there is no suitable competition to encourage a fair price. This is especially dangerous when it comes to semiconductors, as they are in almost every piece of technology. The ripple effect of such an increase would escalate the price of everyday electronic items, disproportionately affecting lower income households and countries and also exacerbating the global digital divide.
Major semiconductor companies have successfully pioneered their way into the market and created a comfort zone posing significant challenges for the broader ecosystem, potentially stifling competition and innovation while widening the gap in global technological equity.
The views expressed in this article are the author's own, and may not reflect the opinions of The St Andrews Economist.
Image Courtesy of Vishnu Mohanan via Unsplash
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