The revolution in semis and what it means for the energy transition

The Semiconductor Industry Association said global semiconductor industry sales topped $47.4 billion during the month of August 2022. This was an increase of just 0.1% over the August 2021 total of $47.3 billion but a decrease of 3.4% compared to July 2022’s $49 billion. Such modest growth is barely noteworthy, particularly compared to news headlines oriented around bottlenecks that have affected supplies of consumer goods from cars to computers. As the industry figures indicate, this is a mature sector. We have semiconductor chips with everything, to the extent that it might be hard to see where further growth will come from. If anything, lower consumer spending in an inflation-prone global economy might be expected to dampen any growth outlook.

However, at Alexa Capital we believe the sector is set for superlative growth, potentially expanding by up to 8% a year to hit a trillion dollars annually by 2030. So where will this growth come from?

Digitalisation and electrification

Fundamentally, growth will be a function of the widespread digitalisation of industry, with the power and automotive sectors at the forefront. It is no secret that the energy system faces what is possibly its biggest upheaval since the invention of the steam engine.

We are transitioning away from fully dispatchable thermal power based on fossil fuels to a massively electrified energy system drawing on renewable generation sources that are only intermittently available. This requires a complete rethink of how the power grid works. Instead of simply burning fuel whenever or wherever we want, in future we will need a system that reacts intelligently to the availability of energy, using and storing power when it is available and returning it to the system or incentivising curtailed demand at other times.

What is perhaps less commonly appreciated is the role that digital technologies will play in this transformation. The only way the energy system can become flexible enough to operate in a low-carbon world is if every asset it encompasses is imbued with intelligence. Take something as simple as an air conditioning (AC) system. Traditional AC systems use single-speed motors that grind on throughout the day regardless of whether they need to go full pelt or not. This is not an issue in an environment where you get more electricity just by burning more fossil fuels. But this level of waste is not acceptable in a world where sources of power are not available all the time and you have to use every electron as efficiently as possible. That is why AC systems in Europe, China, India and elsewhere increasingly feature inverters that vary the speed of the motor according to demand.

Inverters can not only save AC energy consumption by up to 25% according to semiconductor maker Infineon, but also reduce maintenance requirements and extend the lifespan of the machines, all of which save money. And all this is thanks to the chips that give inverters a measure of intelligence. More widely, semiconductors are at the heart of the Internet of Things (IoT), a key energy transition technology trend that involves connecting sensors to inert assets so their status can be monitored and controlled by centralised systems.

The IoT and electrified transport

The IoT has a wide range of applications, from preventing industrial equipment failures to helping monitor and control traffic flows. In the power system, it will touch almost every part of the energy transition, from enabling peer-to-peer electricity trading in solar-powered communities to tying industrial and residential assets together for virtual power plants or demand response operations.

Finally, there’s the automotive sector. Cars are already packed with smart electronics, but the level of automotive intelligence is set to soar as electrification turns vehicles into a mobile extension of the electricity network. Carmakers are already using advanced semiconductor technologies to wring new levels of performance from electric vehicle batteries. This trend was sparked by a seemingly minor design change at Elon Musk’s Tesla Motors in 2017.

That year, Tesla started specifying more expensive silicon carbide-based semiconductors for the traction inverters on its Model 3 sedan. This move, which came before the current semiconductor supply crisis, was hardly what you would expect of a manufacturer trying to bring an affordable electric vehicle to market. Silicon carbide (SiC) chips are so-called compound semiconductors, thus named because they rely on a combination of materials for enhanced performance. However, SiC and other compound semiconductors, such as those using gallium nitride (GaN), have traditionally been difficult and expensive to make, so their use has been restricted to high-asset-value sectors such as aerospace, R&D and the military.

Growth outlook for power semiconductors by application (SiC and GaN)

Performance pays

SiC power semiconductors, for example, have only half the energy loss of standard silicon-only semiconductors and are better at dissipating heat, which means the inverters needed for car batteries can be made smaller. What Tesla realised was that it was worth paying a premium for the semiconductors because of the efficiency gains they could bring to other parts of the product. Masayoshi Yamamoto, a professor at Nagoya University in Japan, told Nikkei Asia that the Model 3 has an air resistance factor as low as a sports car's, partly thanks to the use of scaled-down inverters. It did not take long for other carmakers to notice.

By 2020, the research company Omdia was predicting the GaN and SiC semiconductor markets would be worth $1 billion within a year, mainly because of growing adoption in the automotive market. In June 2022, Goldman Sachs estimated the market for SiC alone would be worth $11.3 billion by 2030, a more than 10-fold increase. Compared to traditional insulated-gate bipolar transistors (IGBTs), SiC chips can enable efficiency gains of up to 10% in electric vehicle battery systems. This means an electric vehicle with a 60 kilowatt-hour (kWh) battery could gain up to 6 kWh of energy by swapping from IGBTs to SiC.

This equates to up to an extra 10% mileage for a given battery size or 10% less battery for a given mileage. SiC chips also allow for 30% faster charging times because of their high voltage resistance compared to traditional, lower-cost IGBTs. And they may enable substitution of expensive nickel-manganese-cobalt lithium-ion batteries for cheaper lithium iron phosphate modules. But the importance of compound semiconductors goes far beyond simply overcoming electric vehicle supply chain issues. The efficiency benefits these semiconductors offer also apply to other power devices. There is interest in using compound semiconductors in wind and solar inverters as well, for instance.

Improving economic viability key to triggering EV-related SiC industry growth

Accelerating growth: IoT and automotive

Overall, demand for compound semiconductors is set to explode as they become the standard for power applications. McKinsey & Co forecasts around 70% of predicted growth in the semiconductor market will come from just three industries. Two of these, wireless and computation, would be expected to continue growing anyway but demand is due to mushroom in the face of widespread adoption of the IoT, which could effectively turn almost any manmade thing into a tiny Internet-connected computer.

The third sector, automotive, is set to see the strongest growth of all not only because of massive demand for advanced semiconductors from the electric vehicle industry but also because these chips are more expensive than their predecessors. The average SiC content for a battery electric vehicle in 2025, at $720, will be well over two times the $315 cost of using IGBTs, according to Goldman Sachs. And by 2030, McKinsey & Co says the chip value of an electric drivetrain could be $4,000, compared to $500 for an internal combustion engine vehicle—an eightfold increase.

SiC is likely to corner the market for high-power applications, with Goldman Sachs estimating its use in battery electric vehicles could see a 31% compound annual growth rate (CAGR) between 2021 and 2030. GaN, on the other hand, seems more suited to high-frequency, low-voltage use cases such as domestic appliances and portable devices. It is already commonly used in radio frequency (RF) technologies and is expected to dominate the electronic power supply market.

Leading power semiconductors by application (SiC and GaN)

Viewed through this lens, it is clear the semiconductor industry is on the cusp of a transformation every bit as big as that ushered in with the arrival of the iPhone in 2007, which led to the emergence of the smartphone market and rising demand for gallium arsenide (GaAs) compound semiconductors. These are used in RF power amplifiers for mobile phones as well as in solar cells. The market for GaAs was worth around $3 billion in 2007, according to data from Barclays Research and Strategy Analytics. Within a decade it had more than doubled, to around $7.5 billion, with mobile radio and wireless infrastructure accounting for 80% of the total.

It is no exaggeration to say the opportunity for compound semiconductors in the power and electric vehicle sectors could be as large as, if not larger than, the growth created by smartphones in telecommunications.

Growth driven by sustainability

And it is not just the size of this opportunity that makes it attractive to investors. A major allure is that growth in the compound semiconductor market is as good as assured given the urgent need for global decarbonisation of the energy system. Also of note, the compound semiconductor market—unlike that for traditional chips—is dominated by players in Europe and North America.

Power semiconductors are powering growth. Since 2020, the power semis segment has been more favoured than traditional semiconductor makers in environmental, social and corporate governance-focused funds.

Profile of % under/overweight of Power Semis and the Broader Semis universe over time

Semiconductor companies are rushing to install manufacturing capacity in preparation for mounting orders. German semiconductor manufacturer Infineon Technologies, for example, in October opened a new factory in Cegléd, Hungary, dedicated to the assembly and testing of high-power semiconductor modules to drive the electrification of vehicles.

In addition, Infineon has invested in further production capacities for high-power modules that enable green energy, from wind turbines and solar panels to energy-efficient drives. Also in October, Geneva-headquartered STMicroelectronics unveiled plans to build an integrated SiC substrate manufacturing facility in Italy, with production expected to start in 2023. This will support increasing demand from customers across automotive and industrial applications.

Meanwhile, Nasdaq-listed OnSemi announced the opening of a new design centre for state-of-the-art semiconductor chips in Bucharest, Romania. And in September, Durham, US-based Wolfspeed announced it will build a new multi-billion-dollar materials manufacturing facility in Chatham County, North Carolina, giving it a 10-fold increase in SiC production capacity.

There is also a rapidly growing ecosystem of design, test, assembly and fabrication capacity providers that supports the integration of electronics into our electrifying power system. Value chains are moving to diversify from the major manufacturing facilities in Taiwan and China and into advanced fabrication centres in North America and Europe, following the trends being seen in Li-ion batteries, photovoltaic solar and electric vehicles.

Supporting strategic and institutional capital flows

At Alexa Capital we see the scaling up of power semiconductors as leading to a step change in clean technology adoption, creating vast opportunities for the deployment of capital not just in the semiconductor companies themselves but also throughout the semis ecosystem.

To maximise the value we can offer to clients in this area, in September we added a new semiconductor-focused team to our practice. The team, all previously executives at Apple chipmaker Dialog Semiconductor, comprises Mark Tyndall and Alex McCann, who are focusing on cross-border mergers, acquisitions and capital advisory services, and Dr. Jalal Bagherli, who joined as advisor to the Alexa Capital Insights Council. The team is already busy—and the rush has barely started.

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