Getting the Lowdown on Chips
With tech banker Jonathan Weinberger
News about semiconductors is covered almost daily due to their critical importance to the modern economy and the geopolitical concerns about ensuring future supply.
We asked Jonathan Weinberger, a Senior Banker in the Technology sector, a growing area of focus for SG in the Americas, to put the topic in perspective for us, give us some insight into how the semiconductor industry is evolving, its importance, and how banks like SG are playing a role in the technology’s development
Jonathan, why are we hearing so much about semiconductors now, a technology that’s been around since the 1940s?
Semiconductors are always important but not always newsworthy. The current focus on semis arises because of three important developments. First, the demand for semiconductors is growing sharply. In the automotive sector, electric vehicle development has increased demand for semis because EVs use about twice as many chips as vehicles with internal combustion engines. Across consumer products, the idea of an internet of things has taken hold: so, doorbells are smart, lightbulbs have remote controls, and watches monitor heart rhythms. Gaming and blockchains are demand drivers. And most topically right now, artificial intelligence has seen a step change in capability. The computing workload associate with large language models is booming.
Second, COVID supply chain disruptions were particularly acute in the semiconductor industry because it is one of the most globalized supply chains. Inputs to finished semiconductors are sourced globally: the US accounts for 39% of the value of finished products, South Korea for 16%, Japan for 14%, Taiwan for 12%, Europe for 11%, and China for 6%.
Third, they’ve become a political topic. Because of the wide and increasing demand for semiconductors everywhere from consumer products to the defense industry to the vanguard of AI, semiconductors are a high value and systematically important economic input. The most advanced semiconductor manufacturing is on Taiwan, and increasingly US and European governments are taking measures to create similarly advanced manufacturing locally. For example, the CHIPS Act, which was signed into law in August 2022, provides $53bn for semiconductor R&D. Keep in mind that in 1990 more than 75% of global semiconductor manufacturing capacity was in the US and Europe, but by 2020 it was less than 20%.
Due to the prevalence of semiconductors in the news, I think we’re just now realizing the range of products that rely on them to work. Are there certain emerging industries where securing a supply of the most sophisticated Chips is a do or die proposition?
That’s right. Semis really are everywhere. The term ‘semiconductor’ refers to some physical properties of the material used in the fabrication process, but if we think about applications – what the integrated circuit that is printed on the semiconducting material is meant to be doing – there are a great many uses. There are semiconductors that store data (for example, photo storage in a drone’s camera), that change analog signals into digital signals (for example, to turn voice into digital data in a cell phone), that transmit radio frequencies (for example, to connect to Bluetooth), and some that are extremely flexible in what they can do. This last category, microprocessors, gets lots of the attention – we talk about our computers running an M1 CPU or an i9 CPU. Microprocessors tend to be the most expensive chips, but they aren’t the most numerous.
We see demand for the most advanced chips coming from several places. The biotech industry uses computational power to develop drugs. Data centers are a growing source of demand because the amount of digital data being generated is growing so quickly, requiring storage, and because the analytical tools, which require computing power, available to understand that data are quickly improving. Electric vehicles and power grid management are emerging sources of demand. As these fantastic AI tools like GPT and Bard are widely adopted and as new uses are found, AI will be a dominant factor in demand for advanced chips
When semiconductors are in the news, it is often related to the most advanced processes, the newest technical developments, but there are absolutely essential chips that are based on long-established and optimized manufacturing systems. These are integral to most every manufacturing process and any device with a plug or a battery which means that you’re surrounded by them.
Let’s turn to another topic that seems to impact almost every industry, climate change. Do climate and, more broadly, ESG considerations come into play when thinking about the semiconductor industry?
There are at least two important ideas here. First, environmental considerations are relevant to the semiconductor manufacturing process, as they are in any manufacturing activity. Semiconductor manufacturing requires incredibly clean water, and a result you see that manufacturers are quite focused on water efficiency – its use, discharge, consumption, and conservation. Sourcing renewable power to run foundries is a focus, and in general the sector is using the SBTi methodologies to map a course to net zero carbon manufacturing.
Second, semiconductors – information technology more generally – is a critical enabling tool for addressing climate change. Climate modeling, like all weather modeling, in computationally intensive. Electric vehicles and smart power grids both rely on much more computational power than earlier cars and electrical systems did, and that computing power is what enables them to be more energy efficient. As more and more activities take seriously the need to optimize for energy use, more computing will be used to deliver that optimization.
As a last remark, the timing of our conversation is notable because Gordon Moore, co-founder of Intel, eponym of Moore’s Law, and one of the pioneers of the semiconductor industry, passed away in March. He was as important to this technology and to this industry as any one person can be.
And finally, as a banker, can you give a few examples of how Societe Generale can deploy its expertise to support this complex industry?
About two years ago, SG determined that we should increase our focus on semiconductors as an important sector of the economy and a natural extension of our longstanding technology banking efforts. Since that time, we’ve supported clients in a variety of transactions across the range of banking products. Notable examples include acquisition financing for a very large merger, which draws on our corporate finance advisory capabilities and debt market expertise, and structured financing for a new semiconductor foundry, which was a novel approach to use using third-party capital to jump start significant capital investment and draws on our relationships with asset managers. As a whole, our combination of advisory and finance capabilities is well positioned to support the semiconductor industry as it continues to develop.
Unless otherwise stated, any views or opinions expressed herein are solely those of Jonathan Weinberger and may differ from the views and opinions of others at, or other departments or divisions of, Societe Generale (“SG”) and its affiliates. No part of Jonathan Weinberger’s compensation was, is or will be related, directly or indirectly to the specific views expressed herein. This material is provided for information purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or financial instrument. The information contained herein has been obtained from, and is based upon, sources believed to be reliable, but SG and its affiliates make no representation as to its accuracy and completeness. The views and opinions contained herein are those of the author of this material as of the date of this material and are subject to change without notice. Neither Jonathan Weinberger nor SG has any obligation to update, modify or otherwise notify the recipient in the event any information contained herein, including any opinion or view, changes or becomes inaccurate. To the maximum extent possible at law, SG does not accept any liability whatsoever arising from the use of the material or information contained herein.
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