The Business Of

Semiconductors | Nvidia | What Do They Do?

Morning All!

Welcome back to The Business Of! So, before the break, we explored The Business Of Movies. And broke down the business models of Cineworld, Netflix and Disney.

This week we start a new 3-week series and I’m super excited for it. Because it’s not the easiest industry to understand. But it’s one of the most important industries in the world today. We’re going to be diving into The Business Of Semiconductors!

Now, don’t worry if you don’t really have a clue about semiconductors. We’re going to simply (hopefully!) explain what semiconductor companies do. How these firms make money. And the costs involved. Over the next 3 weeks, we’re going to be looking at these 3 massive companies;

• Nvidia - designs semiconductors. #7 company in the world by market cap.

• TSMC - manufactures semiconductors. #15 company in world by market cap.

• ASML - provides equipment to the manufacturers. #35 company in world.

Today, we’ll set the scene by breaking down the industry into 3 parts: (i) Which products use semiconductors the most. (ii) The different types of semiconductor chips. And (iii) The different players in the semiconductor universe. But first, let’s actually talk about what on earth semiconductors are! So, without further ado… !

Smaller Than A Human Hair… About 20,000x Smaller!

So let’s take a quick trip back to secondary school science lessons! Substances that allow the flow of electricity are called conductors (e.g. copper). And those that don’t allow the flow are called insulators (e.g. wood). Semiconductors are in the middle! Materials like silicon can conduct electricity. But only under certain conditions.

And this ability to allow the flow of electrical current under certain conditions is so crucial for how electrical devices operate. Over centuries, scientists realised that we can create ‘electrical switches’ using semiconductor substances. When the switch is on, electrical current flows through. And when the switch is off, it doesn’t.

What does this mean? Well, it means that these switches - that store information - can be turned on or off (using binary code) to carry out commands. For example, when we open a particular app on our phone. The semiconductor chip in our phone uses binary code to turn a particular switch on. Which then opens that particular app for us. These electrical switches are called transistors.

But hold on, because most of us have loads of apps on our phones. And loads of different functions we can perform. Taking photos, making a call, texting, etc. So won’t the semiconductor chip in our phone need loads of transistors to perform all these functions? Well, yes! The semiconductor chips in our phones have billions of transistors in them. The chip that fuels the iPhone 13 has 15 billion! And the reason we can fit billions of transistors onto a chip is because they are tiny. And by tiny, I mean unbelievably tiny. The width of a human hair is ~100,000nm (nanometres). The width of the transistors in our phones are ~5nm. So these transistors are 20,000x smaller than human hair! The screenshot below gives you some idea of how small we’re talking…

As electronic devices have become smarter, and smaller, tech companies have needed more and more transistors crammed into smaller spaces. And so semiconductor firms have spent billions on research to make these transistors smaller. Back in 1959, the size of a transistor was 20 micrometers (20,000 nanometres). By 2004, this had reduced to 90nm. And today, the cutting edge transistors are only 3nm!

Smarter Products = More Chips

Great, so I hope the above is clear. Semiconductor chips are incredibly important for electrical devices. And they are basically the brains behind the modern world.

Because of their importance, semiconductor firms are amongst the largest companies globally. Nvidia is the 7th largest company in the world! And the semiconductor industry as a whole made ~$600bn in revenues last year. The chart below shows us which end-markets made up that $600bn…

As we can see, smartphone makers are the #1 customer for the overall semiconductor industry. And this makes sense. Most people around the globe have a smartphone. Every smartphone requires a semiconductor chip. And so companies like Apple, Samsung, etc. are some of the biggest chip buyers globally.

PCs come in at #2. Servers #3. For similar reasons as I mentioned for smartphones. An interesting segment to touch on is automobiles. As cars become smarter (cruise control, lane assistance) and more electric, they require more semiconductor chips. The chart below shows how the no. of chips per vehicle has increased noticeably over the last decade. And how EVs require more chips than traditional ICE cars…

So expect the demand for chips from car manufacturers to continue growing in the near future!

Logic > Memory > Analog

Okay, so we know there’s billions of semiconductor chips around the world today (and billions and billions of transistors!). But are these chips all the same? No, no, no! There’s in fact 3 main types of chips - logic, memory and analog. And let’s briefly touch on what these chips do below...

Logic chips (50% of market). So within logic chips, there are two main parts. The CPU (central processing unit) and the GPU (graphic processing unit). The CPU really is the heartbeat of devices and handles pretty much all the core processing tasks. You wouldn’t be able to run programs, save documents, or do anything without it! The GPU handles more complex data-intensive tasks. It helps devices with graphics - for example with streaming and gaming. And recently it’s even been used for crypto mining!

Memory (30%). So within memory chips, we again see 2 different types of chips - DRAM and NAND. And these chips are both used for storing data. But then what’s the difference? Well, the DRAM chips only save data while the device’s power is on. Whilst the NAND chips save data even when the device is turned off. For example, in your phone, DRAM chips remember where you were in an app even when you go into another app. Whilst NAND chips will save your photos when your device is off.

Analog (20%). The final type of chip is the analog chip. And these chips are commonly thought of as the bridge between the real world and the digital world. They take a real-world sense, (like sound or light), and turn it into a digital signal. As an example, I can think of Siri - your phone takes a real-world sense (your voice). And turns it into a digital signal (whatever you’ve asked Siri to do)!

So How Do Chips Actually Get To Customers?

Okay, so we’ve looked at end-markets and the types of chips. Now let’s touch on the different players involved in getting semiconductor chips to customers!

Designers - these companies, like Nvidia and Qualcomm, spend their entire time designing chips. They don’t actually make the chips because this is a capital intensive process and would cost them a lot to set up! So they design chips and then outsource the manufacturing.

Manufacturers - companies, like TSMC, manufacture the chips that companies like Nvidia and Qualcomm design. TSMC is a giant manufacturer and actually manufactures >50% of the semiconductor chips in the world!

Integrated device manufacturers (IDMs) - okay, so we’ve seen some companies just design chips. And some companies just manufacture chips. But there are some companies, like Intel and Samsung, who design AND manufacture their own chips!

Equipment providers - this blew my mind. And it might blow yours too. But the machines that manufacturers like TSMC, Intel and Samsung require to produce chips are incredibly big. And incredibly expensive. The machines produced by ASML, and sold to manufacturers, are as big as a bus and cost a whopping $150m+!

Software providers - now, designing transistors that are 3nm in size requires an awful lot of precision. And companies like Synopsys create software for designers (like Nvidia) to help them with their fine details!

Back To The Business Of Nvidia

So, where does Nvidia fit into all this? Well, we’ve mentioned already that Nvidia is a designer of chips. But what end markets do they serve? What kind of chips do they design? Well, we’ll dive into this and much more over the next 4 days as we break down the business model of Nvidia!

30th Apr 2023

Nigel Jacob CFA