I don’t often talk about silicon. But amid the current trade wars, this uniquely American commodity is on a tear right now.
“Semiconductors are arguably humanity’s greatest achievement to date.”
Specifically, silicon semiconductors, also known as the integrated circuit or the computer chip. Made of silicon, cobalt and copper, these semis sit inside almost every electronic device you can imagine.
“Semiconductors are arguably humanity’s greatest achievement to date,” says Jimmy Goodrich, vice president of global policy at the Semiconductor Industry Association. “They’re still central to everything that’s modern or electronic, whether you’re driving a car, or surfing the internet or using a supercomputer — everything is ultimately based on a semiconductor, and lots of them.”
The U.S. chip industry generates a staggering $164 billion in sales each year, with entire sub-industries evolving to serve them.
And that number is only going to go up as “5G” — faster, higher-capacity networks — opens up an array of new technologies. Connected and self-driving cars, remote robotic surgery, smart cities and factories are only the beginning of what is possible.
Additionally, semiconductor technology ensures that a country’s military remains cutting-edge, providing leverage over other nations.
Many semi firms are companies are growing like gangbusters in spite of the U.S.-China trade war. The VanEck Vectors Semiconductor ETF (SMH) is up 35.8% year-to-date.
And the world’s most sophisticated semiconductor firms — which include Qualcomm (Nasdaq: QCOM), Nvidia (Nasdaq: NVDA), AMD (Nasdaq: AMD), Micron (Nasdaq: MU) and Intel (Nasdaq: INTC) — all reside stateside.
China, meanwhile, is far and away the world’s largest purchaser of semiconductors. According to Bernstein Research, China bought approximately $160 billion in semiconductors in 2016. That puts it ahead even of the country’s oil imports, according to the South China Morning Post.
Given China’s manufacturing prowess, its lag in semiconductors might seem surprising. Why can’t it simply analyze products from the U.S. and produce its own copies?
It’s because semiconductors are some of the most complex products on earth.
The R&D necessary to make advancements in chip design can take decades. “Let’s say you’ve got 5,000 engineers that can reverse engineer the chip and look at the chip layout — by the time you’ve done that, the American company’s already two generations ahead of you,” says Goodrich.
Beyond designing chips, building a production facility can cost between $10 billion and $15 billion.
The methods used in creating the chips are also highly proprietary, and factories need to produce them quickly with as few defects as possible. “You’re literally dealing with a process that is one atom at a time. That knowledge base is not something that you can just go and copy overnight,” says Risto Puhakka of VLSI Research, a California firm that tracks the semiconductor industry.
Analysts say China’s semiconductor makers remain five to 10 years behind world-class companies in the U.S., Korea and Taiwan.
As a result, China’s telecom sector looks set to remain hugely reliant on U.S. chips for years to come.
Any American producer is a good long-term bet for your investing dollars. Alternatively, the VanEck Vectors Semiconductor ETF (NYSE: SMH) is a great way to get exposure to the broader market. After making a short-term bottom on May 29, it’s been on a tear.
All the best,
Sean