There are more and more variables in chip development, and industry prediction is becoming more and more difficult

Ed Sperling, editor-in-chief of Semiconductor Engineering, a semiconductor industry magazine, recently issued a document saying that it is no longer a simple mathematical formula to understand the development of the chip industry, but there are more and more variables in it. What factors affect the development of today's chip industry? China Sea Semiconductor will present you with the views and opinions edited by Ed Sperling, and also provide you with a new perspective to understand the semiconductor industry.

Throughout 2023, due to the saturation of smart phone and PC market, DRAM and flash memory inventory and overcapacity, IC sales were flat or even declined, but this does not mean that the whole chip industry is going downhill. To understand the development of the chip industry, it is necessary to comprehensively consider horizontal trends such as technology and geopolitics, as well as increasingly digital and vertical markets in specific fields.

The overall trend worthy of attention is both technology-driven and geopolitical. Artificial intelligence is a bright spot, which will have a significant economic impact on high-income economies. However, the fragmentation of regional politics is a root of its fluctuation, and industrial policies will create new growth hotspots.

These same horizontal trends are closely intertwined throughout the chip industry. In consumer electronics, the old method of encapsulating everything in one SoC is becoming untenable. As components shrink and more functions are added to devices, chips will be decomposed into smaller chips or subsystems and assembled in some type of advanced package in a unique way.

The value of these decomposed components will vary greatly, and with the fluctuation of supply and demand of different small chips, it is likely to bring greater fluctuation to pricing. Designing a 90-nanometer analog chip is easier and cheaper than shrinking it to 3 nanometers. This increases power, performance and area/cost (PPAC) options available to chip manufacturers, making it harder to predict how they will prioritize their choices.

Physics is an increasingly important economic factor. For example, SRAM has encountered a bottleneck in scalability, prompting chip manufacturers to replace it with DRAM as L3 cache. This needs to be taken into account when calculating DRAM chip shipments, but it is much more complicated than just counting the number of chips in the DIMM slot. The new DRAM will be connected to the chip in different ways, and have different types and different locations to shorten the physical distance of specific functions. DRAM can be centralized in the data center using CXL, which will improve utilization.

Regional variableThe development of chip industry is influenced by many factors, including regional politics, economic situation, performance, reliability and computing resources. With the advent of advanced packaging and small chips, the measures of fab capacity and wafer output have become increasingly vague, but they have also become increasingly difficult to measure in the geopolitical context.

Supply chains have been highly restricted over the past year, with waiting times of six months to a year for new cars and appliances, caused by an economic downturn triggered by China's housing crisis, similar to the recession triggered by the U.S. housing meltdown in 2008. Although the construction plan of wafer factory is underway, more production capacity is still needed to support the industry worth $1 trillion. Wafer factory construction is being planned in Europe, the United States and Southeast Asia to alleviate the problem of overcapacity.

In addition, the economic situation has become more chaotic, and Apple products sold to China have decreased, but this is mainly due to trade restrictions rather than economic factors. With the development of regional political competition, the change of restrictive measures is of no help.

Performance, reliability and universal access to computing resources are also factors to consider. The buying frenzy at the start of the pandemic sent chip sales soaring, depleting all available manufacturing capacity and creating huge shortages for second-tier manufacturers. Today, the consumer market is saturated because most buyers use devices longer than in the past, and their devices start to slow down or their batteries can't keep enough power. In addition, there are more external resources available for processing and storing data.

Just adding more pixels to smartphone cameras is not enough for most people to buy new phones, so consumer electronics companies are racing to add generative artificial intelligence features to their devices. ChatGPT can provide more tailor-made information instead of a generic response to Alexa or Siri queries, which in turn requires more servers and more powerful servers, which helps explain why chip manufacturers such as EDA and NVIDIA are booming.

EDA growthAccording to the Electronic Design Market Data Report released by SEMI, EDA and IP revenue reached 4.7 billion US dollars in the third quarter, up 25.2% year-on-year. Among them, IP physical design and verification jumped by 45.3%, far exceeding the exploration stage of design. These are real chips developed for practical applications and are being prepared for manufacturing.

Some of the chips are developed for edge devices, while others are driven by systems companies, which account for about 25% of the wafers, most of which are for internal use rather than commercial sales. In addition, when systems companies buy EDA tools, they buy everything they need to provide engineers with a complete set of equipment, not just one or two tools. The economy of chip design there is also very different from that of consumer devices, because the value lies in the performance and power consumption of the whole data center.

"Profit growth is very strong," said Walden Rhines, executive sponsor of the SEMI Electronic Design Market Data Report. "2023 is a negative 10% year for the semiconductor industry, but a strong growth year for EDA. So what's the point of this? The answer is that companies keep buying. You have to remember that now we have this phenomenon, and a quarter of the foundry wafers go to non-semiconductor companies. We no longer have this correlation with semiconductor revenue. This means that you can get purchase logs from companies whose EDA is not a big expense to them, and they are all in the artificial intelligence competition now. If you look at the specific categories of purchases, you will find that the most shocking thing is the IC layout. This means heavy design and the actual layout of the chip. It's not just about fab-free companies outsourcing their layouts. "

Figure 1: Revenue in the third quarter of 2023 by market segment and geographical area. Source: SEMI Electronic Design Market Data

Rhines predicts that by 2023, the size of EDA industry is likely to reach 17 billion US dollars, which is a rapid growth for the industry. Some of these drivers have also driven an increase in M&A activity-Synopsys' upcoming $35 billion acquisition of Ansys is a good example-and the company is preparing for the next wave of artificial intelligence, new growth in the vertical market, and using government funds.