Will Internet giants change the semiconductor landscape?

Source: Content from "Digital Times", thank you.

Recently, Qualcomm CEO Steve Mollenkopf showed goodwill and hoped to re-cooperate with Apple. The dispute between Apple and Qualcomm began in 2017. Apple accused Qualcomm of charging unreasonable patent licensing fees, while Qualcomm accused Apple of illegally stealing trade secrets. Now if the two companies are willing to reconcile and work together, it will have a major impact on the reorganization of the semiconductor industry. Steve Mollenkopf showed goodwill and hoped to re-cooperate with Apple. The dispute between Apple and Qualcomm began in 2017. Apple accused Qualcomm of charging unreasonable patent licensing fees, while Qualcomm accused Apple of illegally stealing trade secrets. Now if the two companies are willing to reconcile and work together, it will have a major impact on the reorganization of the semiconductor industry.

However, I think there is another important trend behind this news that deserves attention, and it is likely to be the biggest force impacting the semiconductor industry in the next decade. I believe that huge companies like Apple, which were created in the Internet era, will have a huge destructive force on the semiconductor industry in the next decade, and the force will become stronger and stronger, and even change the face of the entire industry.

First, the dispute between Qualcomm and Apple has been settled since Qualcomm's CEO said so. The situation is clear, because if the war continues, Qualcomm will be the first to be unable to bear it. Apple is too powerful in terms of economic scale and industrial strength, and it is not a customer that Qualcomm can afford to offend. Especially Qualcomm, which used to be the leader in IC design, has lost its market value to Nvidia and Broadcom. If it cannot get Apple's orders back in the future, its market value will probably fall further.

That’s right, the most important indicator for observing economic scale and industrial strength is the company’s stock market value.

If we rank the FAAMG in the US and BAT in China by market capitalization, these Internet giants can be roughly divided into three levels. The most influential ones in the first level are Microsoft, Apple, Amazon and Google, with market capitalizations between US$850 billion and US$770 billion. The second level includes Alibaba, Facebook and Tencent, with market capitalizations between US$410 billion and US$380 billion. As for Netflix, with a market capitalization of US$120 billion and Baidu, with a market capitalization of US$65 billion, they can only be classified as lightweight companies with a much smaller scale.

Who is the giant and who is the dwarf?

The market value of these network giants is far ahead of all industries in the world, and of course it also clearly surpasses semiconductor companies. Looking at the semiconductor companies with the largest market value in the world, Samsung, Intel, and TSMC can be regarded as the first echelon, with market values ​​between 260 billion and 200 billion US dollars (however, Samsung Electronics includes semiconductor and mobile phone businesses, etc., and is not a pure semiconductor stock). As for the second echelon, it should be represented by Nvidia, Broadcom, and Qualcomm, with market values ​​between 100 billion and 70 billion US dollars. In addition, if we compare the representative team of Taiwan's semiconductors, MediaTek is 13 billion US dollars, ASE is less than 10 billion US dollars, and UMC is less than 5 billion US dollars. It is easy to distinguish who is the giant and who is the dwarf.

Market capitalization is a comprehensive index of corporate strength and a specific indicator of corporate influence, which will have a huge impact on industrial development. In the early years, before the rise of the information technology (IT) industry, the telecommunications industry had an important influence on the development of science and technology. However, after the market capitalization of IT industries such as Intel, Microsoft and Cisco surpassed the telecommunications industry in 1997, the information industry began to determine the direction of the development of the technology industry. The rise of the Internet industry in the mid-to-late 2000s not only snatched the influence of the information industry, but also made the influence of the telecommunications industry decline, gradually becoming a "stupid plumber" working for others.

The size of the market capitalization will be a factor in whether large companies decide to enter the market. For example, heavyweights such as Google, Apple, Microsoft, and Amazon can easily poach excellent semiconductor talents, set up internal IC design teams for product development, or look for and invest in excellent IC companies externally. This is definitely not a problem for large companies with plenty of cash. As for China's Huawei, it invested in HiSilicon, a chip design company, more than ten years ago. Alibaba established the artificial intelligence chip team Pingtou Ge this year. Tencent, Baidu, Xiaomi, and even Haier in the home appliance industry have begun to invest in the IC business. These are all examples of various industries rushing to attack semiconductors.

The huge difference in market capitalization is also a key factor in Internet giants' decision to make mergers and acquisitions.

Two years ago, ARM, the leading IP manufacturer in the IC design industry, was acquired by SoftBank for $32 billion, which is a typical example. With a market value of nearly $100 billion, SoftBank raised $100 billion in its first Vision Fund, which came from the Middle East and the technology industry. This is the most concrete gathering of international capital. This acquisition has actually announced that the Internet Army is not only involved in semiconductors on a large scale, but also actively changing the industry. By controlling this IP manufacturer, which is the core of semiconductor design, it will further control the global Internet of Things industry in the future.

All aspects of the semiconductor industry,

Which area is most likely to be disrupted?

In addition to market value factors, the semiconductor industry has entered maturity and the development of Moore's Law has slowed down, which is also the main reason for network giants to enter the development. The phenomenon of the maturity of the semiconductor industry is obvious, such as the end of high growth and meager profits caused by fierce competition. This industrial environment also gives talents an opportunity to be released. Network giants can easily find talents and start various IC product designs internally, cutting into the most promising new topics such as AI, Internet of Things, and self-driving cars.

If it has become a trend for large companies to enter the semiconductor industry, then which area of ​​the semiconductor industry is most likely to be disrupted?

I think it is IC design, packaging and wafer foundry in that order. The reason for this judgment is, of course, market value is still a very important factor. For example, TSMC’s market value is as high as US$220 billion, which is a threshold with considerable competitive barriers. If large manufacturers want to cut in, they will have to think twice if they don’t have a market value five to ten times higher.

However, the market value of IC design is not low either. For example, Nvidia, Broadcom, and Qualcomm are all between 100 billion and 70 billion US dollars. It cannot be said that there is no entry barrier, but because the entry barrier of the IC design industry is relatively low and they are all asset-light, in addition to the aforementioned large companies, there are more small and medium-sized enterprises. In the eyes of the Internet giants with huge market capitalization, these are simply a piece of the cake that can be easily eaten in one bite.

In fact, the most popular thing in IC design in recent years is mergers and acquisitions. For example, Broadcom is a master at growing through mergers and acquisitions. Its $37 billion merger with Avago has made Broadcom a large company with a market value of $100 billion. Therefore, there will definitely be more examples of large network companies acquiring IC design in the future. Small and medium-sized IC design companies will find it difficult to survive independently unless they have very niche product lines.

As for the packaging industry, whose importance in the industrial chain is gradually decreasing, although the market value is not large, it is not necessarily a market that large manufacturers want to enter because the value synergy it can create is limited. At least, investing in IC design can create products such as AI that create more value for customers, but investing in the packaging and testing industry can only earn limited processing money, and there is obviously not much incentive for investment.

From the perspective of market value, three years ago, ASE Chairman Chang Qiansheng proposed a plan to merge with Siliconware Precision Industries, which caused resistance and commotion in the industry at the time. However, even though the merger turned it into the global leader in the packaging and testing industry, its market value is still less than US$10 billion, making it only a little brother in the global capital market. This proves once again that Taiwan should not look at the world with its own narrow vision.

At the end of each year, many friends in the semiconductor industry make serious plans for the next year. Obviously, many people think that next year will not be a good year. However, after watching the evolution of the industry, I still believe that no matter how bad the economy is, the strong will always be strong. It’s just that the Internet army will become an important factor in the industry’s changes and adjustments in the next few years. Taiwan had better prepare quickly, so as not to be mentally unprepared when the disaster comes.

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