Comment: Semiconductors, or chips, have become essential infrastructure for the global economy. Whether it is AI, cloud computing, automation, electric vehicles or industrial digitisation, each one relies on increasing amounts of computing power. At the centre of this demand for computing power sits the semiconductor industry. While semiconductors are often discussed as a single industry, the ecosystem includes several distinct groups of companies.
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Chip designers such as Nvidia and AMD
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Memory producers such as Samsung and Micron
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Manufacturers such as TSMC and Intel
- Equipment suppliers such as ASML and Applied Materials
A structurally stronger industry
The semiconductor industry has historically experienced pronounced cycles. Strong demand would encourage aggressive capacity expansion, eventually leading to oversupply, falling prices and weaker profitability. While these cyclical dynamics remain an important feature of the industry, several structural changes have altered the competitive landscape over recent decades.
Developing and manufacturing advanced semiconductors has become extraordinarily complex and expensive. As an example, in the early 2000s a leading computer chip contained tens of millions of transistors. Today, advanced chips can contain tens or even hundreds of billions of transistors. As performance requirements have increased, so too have the costs and technical challenges associated with designing and manufacturing these devices.
Leading-edge fabrication plants can cost tens of billions of dollars to build, while the technical expertise required to compete at the technological frontier continues to rise. These escalating costs and technical demands have left only a small number of companies capable of operating at the industry’s leading edge, resulting in a highly concentrated semiconductor value chain.
This concentration has created higher barriers to entry and improved industry economics in many segments. While demand cycles have not disappeared, the industry’s structure appears considerably stronger than it was in previous decades.
Why demand continues to grow
Semiconductors are often described as the building blocks of the digital economy. Every year, more devices, processes and services become connected, automated and data-driven. As a result, the amount of computing power required across the economy continues to increase.
AI has accelerated this trend. Training and operating large AI models requires vast amounts of specialised computing infrastructure. Technology companies are investing heavily in data centres, advanced chips and memory systems to support growing AI workloads.
Importantly, AI adoption is still in its early stages. While current investment has focused heavily on model development and cloud infrastructure, future growth is expected to broaden into enterprise software, industrial automation, healthcare, autonomous systems and consumer applications. As AI broadens in terms of its use case, semiconductor demand is likely to expand further, albeit the second wave could be shallower and slower moving than the current AI tsunami.
Risks and considerations
The current AI investment cycle has been powerful, but investors should recognise that this investment cycle may not remain this strong indefinitely.
Geopolitics also remain an important consideration. Semiconductor supply chains are global, with manufacturing concentrated in parts of Asia, particularly Taiwan. For example, TSMC produces around 90 percent of the world’s most advanced semiconductors, making it a critical link in the global technology supply chain. Any disruption to production or trade flows could have significant implications for the semiconductor industry, technology companies, and the broader global economy.
Valuations are another factor. Strong share price performance has increased expectations, meaning future returns will depend not only on continued growth, but also on companies delivering on those expectations.
The long-term opportunity
Despite the inevitable short-term risks, the long-term outlook remains compelling. While the sector remains cyclical, semiconductors sit at the intersection of several powerful structural trends shaping the global economy, including AI, cloud computing, automation and digitalisation. Few industries provide such broad exposure to these themes.
A simple guide to semiconductors
Semiconductors perform different functions within electronic devices. The three broad categories are processing chips, memory chips, and control and sensing chips.
Processing chips – These chips perform calculations and execute instructions. They include central processing units and graphics processing units, which power everything from personal computers and smartphones to artificial intelligence systems and data centres.
Memory chips – Used to store and access data. The two main types are RAM, which provides temporary working memory while a device is operating, and flash memory, which provides longer-term data storage. Memory chips are found in smartphones, laptops, servers and cloud infrastructure.
Control and sensing chips – These chips help monitor and manage physical systems. Examples include microcontrollers used in household appliances and industrial equipment, as well as sensors found in vehicles, smartphones and safety systems such as anti-lock braking systems.
Different semiconductor companies often specialise in different parts of the market, which means demand trends and profitability can vary significantly across the industry. For investors, selectivity and diversification remain important alongside exposure to these structural growth themes.
This article is general in nature and is not financial advice. It does not take into account your financial situation, objectives, goals, or risk tolerance. All investments involve risk and can go down as well as up. Before making any investment decisions Craigs Investment Partners recommends you contact an investment adviser. Craigs Investment Partners Limited is a NZX Participant firm. To talk to one of Craigs ’ financial advisers, please call 0800 272 442. The Craigs Investment Partners Limited Financial Advice Provider Disclosure Statement can be viewed at craigsip.com/tcs. Visit craigsip.com.
