For an industry to demonstrate high growth and dynamics, it usually requires a combination of three key elements, which McKinsey calls "the elements that form the arena." The three elements are: significant changes in technology or business models, investment upgrades, and a large or growing reachable market (often referred to as the Total Reachable Market, or TAM). These three elements usually appear in a certain order, but they also contain unpredictability in time.
First, the formation of an industry often begins with a major advancement in technology or business model that incentivizes participants to invest resources quickly to improve quality. These increasing investments constitute the second element. Subsequently, participants enter a cycle of continuous investment to tap into the huge latent market demand. However, despite the causal relationship between these three elements, the development process of the industry is fraught with uncertainty until the huge latent demand is unleashed and a mature competitive area is formed.
A major breakthrough in technology and business model
The first element is a major change in technology or business model, which fundamentally changes the way products and services are developed or delivered. The performance of a technology (e.g., how many transistors can fit on a silicon wafer per unit area, or the amount of energy stored per kilogram of a battery) and its adoption rate (the proportion of the technology used in a given market) can often be described as an idealized S-shaped curve. When there is a major leap in technological capabilities, its adoption rate rises slowly at first, accelerates after reaching an inflection point, and finally plateaus out and enters the maturity stage. At this time, the market competition pattern often evolves into a mature market dominated by a few large enterprises, but the intensity of competition may still be high.
In reality, technical capabilities and adoption rates don't always fit perfectly into this idealized S-curve, but this conceptual framework is still useful. McKinsey research has found that when technological innovation is significant and pushes the performance trajectory into a new S-curve, there are often major breakthroughs in technology, such as the development of the electric vehicle (EV) industry. Similarly, there are significant changes to business models, often driven by technological innovation, and disrupting existing market structures by changing business models such as who pays for which services, and how to pay, such as e-commerce, video and audio entertainment (streaming services), and so on.
Figure: Since 2000, semiconductor investment has been expanding in the wafer sector
In the case of the semiconductor industry, McKinsey's research sees both significant changes in technology and changes in business models. At the technical level, the semiconductor industry regularly undergoes what is known as a "node reset" – the process of manufacturing a new generation of smaller transistors and components. During the first two decades of the 2000s, semiconductor technology moved toward smaller node sizes every five years or so, consistent with the exponential increase in the number of transistors in integrated circuits predicted by Moore's Law. These industry-wide technology upgrades have led to a gradual decline in market demand for larger node sizes. For example, in 2000, chip production was concentrated in the 0.13 to 0.5 micron (130 to 500 nanometer) range, but just a decade later, only a tiny fraction of the market is still producing chips above 90 nanometers.
At the same time, many companies in the industry have adopted a "fabless" business model, which outsources chip design and sales to other companies that specialize in chip manufacturing (i.e., foundries). Some companies focus on designing chips for specific purposes, such as Nvidia, Qualcomm, and Broadcom. Companies like TSMC focus on manufacturing chips for these fabless companies, while companies like ASML focus on producing specialized equipment (such as lithography machines) needed to make chips. As a result, the semiconductor industry has undergone a drastic shift from a vertically integrated model to a specialized division of labor. However, there are also companies (such as Intel) that adhere to a vertically integrated chip design and manufacturing model, while sourcing production equipment from specialized suppliers.
In summary, major breakthroughs in technology and innovation in business models have jointly promoted the transformation and development of the industry, shaping a dynamic competitive field.
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