Taiwan shines in the golden era of IC design

As it becomes increasingly difficult to make smaller transistors, chip design will play an even more important role in driving chip performance. Taiwan’s chip design industry, ranked number two in the world, provides investors a diversified exposure to the exciting growth that is taking place across Artificial Intelligence, 5G network infrastructure, self-driving cars and the Internet of Things.

Taiwan Domestic Equity Team
Eastspring Investments

Sep 2021 | 5 min read

Taiwan’s Integrated Circuit (IC) design industry ranks number two globally, accounting for 19.3% of the world’s IC design revenues1.

Being part of Taiwan’s unique semiconductor eco-system is key in Taiwan’s IC design success. At the end of 2019, Taiwan had 238 IC fabless design houses, 15 fabrication companies, 37 packaging and testing houses, 6 substrate suppliers, 11 wafer suppliers, 3 mask makers and 4 lead frame companies2. See Fig. 1.

Fig. 1. Taiwan IC ecosystem

taiwan-shines-in-the-golden-era-of-ic-design-fig-1

The top-3 world leading foundry businesses are all in Taiwan. Being in the same geographical location as one’s key customers and suppliers makes supply chain management more efficient. It increases the ease of working with customers and bringing their ideas to fruition. As companies move away from discrete chips and towards integrated chip design, where components are etched directly into layers of silicon instead of being mounted independently, closer collaboration between IC design companies, manufacturers and packaging companies becomes even more important.

Breadth and depth

Taiwan’s IC design industry offers investors both breadth and depth. Within Taiwan’s domestic semiconductor Industry, IC design makes up the second largest share of the industry’s revenue (Fig. 2), with the industry employing more than 41,000 employees as of end 2020. Many of Taiwan’s IC design companies are top ranked in multiple IC design sub-sectors including 5G, power management, server baseboard management controller, audio, radio frequency, high speed interfaces and display drivers. This means that Taiwan’s IC sector offers investors diversified exposure to the exciting growth that is taking place across Artificial Intelligence (AI), cloud computing, 5G network infrastructure, data centres, storage devices, self-driving cars, personal computers and Internet of Things (IoT).

Fig. 2. Composition of Taiwan’s semiconductor industry revenues (2020)

taiwan-shines-in-the-golden-era-of-ic-design-fig-1

The sales of semiconductor chips is expected to grow at a compounded average growth rate (CAGR) of 10.7% p.a. over 2020-2023, driven by structural drivers including 5G, AI, Advanced Driver-Assistance Systems (ADAS), Electric Vehicles (EV) and IoT. This growth rate is almost double its CAGR of 5.5% during 2015-2020. Taiwan’s leading IC design industry will be a key beneficiary as it provides the designs needed by the different domains.

An evolving design landscape

Over the last five decades, Moore’s law, which is the observation that the number of transistors in an IC doubles about every two years, has helped launch smaller, more powerful electronic devices and made computing more affordable. However, it is becoming harder and harder to make smaller transistors. Going forward, innovative IC designs will increasingly drive IC performance and play a key role in the success of emerging technologies.

The data-driven era we are in also brings about new design challenges. ICs may need to process large volumes of data and re-use the data while maintaining power efficiency. Designs are becoming more complex, and design engineers often need to consider trade-offs between components to manage the volume and speed of data that is flowing through the circuits, as well as the need to integrate greater security into the designs.

As higher end applications demand more complex designs, a number of companies are moving away from inhouse IC design. Yet at the same time, the desire for higher performing chips have led other companies (e.g. Apple and Amazon) to design their own chips which are used in the iPhone, Mac computers and Amazon’s data centres. These cross currents create both opportunities and challenges for Taiwan’s leading IC design companies.

US-China geopolitical tensions have also strengthened the resolve of Chinese companies to reduce their technological reliance on the US. As Beijing seeks to identify and replace risky parts and suppliers, some of Taiwan’s IC design companies have benefitted from China’s move away from US suppliers, while others who count Huawei amongst their key clients have suffered in the face of US sanctions on the company.

Not surprisingly, the attractive prospects of the industry have attracted M&A activity. Nvidia Corporation, a US semiconductor company that manufactures accelerator chips largely for the gaming market, is bidding USD40 bn for Arm, a Britain-based chip designer that designs blueprints for general-purpose chips. This could be a gamechanger on many fronts. A successful deal could expand Nvidia’s reach into other markets, potentially increasing competition for some of Taiwan’s IC design companies. It could also mean that Arm, which is an important supplier to many Chinese semiconductor companies, comes under American control, at a time when US-China geopolitical tensions remain high. This could add further impetus to the current trend where China is looking for alternatives to US suppliers, thus benefitting Taiwan’s IC design industry.

Meanwhile, the emergence of RISC-V, a new open source approach to designing chips could lead to more innovation, opportunities as well as challenges. Some of Taiwan’s IC design companies have joined the RISC-V Taiwan Alliance and are positioned for the potential opportunities that could come from the RISC-V open architecture.

Staying ahead

Taiwan’s IC design companies invest significantly in Research & Development (R&D) to stay ahead of competitors. In 2020, Taiwan’s IC design industry invested 17.7% of its revenues in R&D. In comparison, the global semiconductor industry’s R&D expenses as a percentage of worldwide industry sales was 14.2% in the same year3. Meanwhile, Taiwan’s IC design industry’s value add has increased from 25.1% in 2016 to 31.2% in 2020.4

The diversity of Taiwan’s IC industry implies that investors need to stay abreast of developments within the various sub-sectors. A flexible and active approach helps us in identifying IC design companies that can best supply fast-growing technology sectors and work with companies to bring their ideas to fruition. We monitor companies’ technology roadmap, design capabilities, product mix and earnings trend. We also assess their customer portfolio, their ability to secure sufficient foundry support and their potential for market share gains. Just as the top IC design companies stay vigilant in honing their expertise and solutions, we are equally diligent in ensuring that we capture the most attractive opportunities within an evolving design landscape.

For Use with Professional Clients / Qualified Investors Only. Not Approved for Further Distribution or Use with the General Public.

Interesting reads

Japan’s small and mid-caps: An overlooked opportunity

China: Awaiting the catalysts

Asia ex-Japan equities: Prospects for higher returns as corporates “value-up”
ARTICLE ASIA EMERGING MARKETS EQUITY THOUGHT LEADERSHIP

Sources:
1 TSIA, ISTI-ITRI (June 2020)
2 Overview on Taiwan Semiconductor Industry (2020 Edition). Taiwan Semiconductor Industry Association.
3 https://www.electronicsweekly.com/news/business/semiconductor-rd-spend-rise-4-2021-01/
4 Calculated as Taiwan’s IC Design Industry’s Value Added in NT$ divided by the

The information and views expressed herein do not constitute an offer or solicitation to deal in shares of any securities or financial instruments and it is not intended for distribution or use by anyone or entity located in any jurisdiction where such distribution would be unlawful or prohibited. The information does not constitute investment advice or an offer to provide investment advisory or investment management service or the solicitation of an offer to provide investment advisory or investment management services in any jurisdiction in which an offer or solicitation would be unlawful under the securities laws of that jurisdiction.


Past performance and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the strategies managed by Eastspring Investments. An investment is subject to investment risks, including the possible loss of the principal amount invested. Where an investment is denominated in another currency, exchange rates may have an adverse effect on the value price or income of that investment. Furthermore, exposure to a single country market, specific portfolio composition or management techniques may potentially increase volatility.


Any securities mentioned are included for illustration purposes only. It should not be considered a recommendation to purchase or sell such securities. There is no assurance that any security discussed herein will remain in the portfolio at the time you receive this document or that security sold has not been repurchased.


The information provided herein is believed to be reliable at time of publication and based on matters as they exist as of the date of preparation of this report and not as of any future date. Eastspring Investments undertakes no (and disclaims any) obligation to update, modify or amend this document or to otherwise notify you in the event that any matter stated in the materials, or any opinion, projection, forecast or estimate set forth in the document, changes or subsequently becomes inaccurate. Eastspring Investments personnel may develop views and opinions that are not stated in the materials or that are contrary to the views and opinions stated in the materials at any time and from time to time as the result of a negative factor that comes to its attention in respect to an investment or for any other reason or for no reason. Eastspring Investments shall not and shall have no duty to notify you of any such views and opinions. This document is solely for information and does not have any regard to the specific investment objectives, financial or tax situation and the particular needs of any specific person who may receive this document.


Eastspring Investments Inc. (Eastspring US) primary activity is to provide certain marketing, sales servicing, and client support in the US on behalf of Eastspring Investment (Singapore) Limited (“Eastspring Singapore”). Eastspring Singapore is an affiliated investment management entity that is domiciled and registered under, among other regulatory bodies, the Monetary Authority of Singapore (MAS). Eastspring Singapore and Eastspring US are both registered with the US Securities and Exchange Commission as a registered investment adviser. Registration as an adviser does not imply a level of skill or training. Eastspring US seeks to identify and introduce to Eastspring Singapore potential institutional client prospects. Such prospects, once introduced, would contract directly with Eastspring Singapore for any investment management or advisory services. Additional information about Eastspring Singapore and Eastspring US is also is available on the SEC’s website at www.adviserinfo.sec. gov.


Certain information contained herein constitutes "forward-looking statements", which can be identified by the use of forward-looking terminology such as "may", "will", "should", "expect", "anticipate", "project", "estimate", "intend", "continue" or "believe" or the negatives thereof, other variations thereof or comparable terminology. Such information is based on expectations, estimates and projections (and assumptions underlying such information) and cannot be relied upon as a guarantee of future performance. Due to various risks and uncertainties, actual events or results, or the actual performance of any fund may differ materially from those reflected or contemplated in such forward-looking statements.


Eastspring Investments companies (excluding JV companies) are ultimately wholly-owned / indirect subsidiaries / associate of Prudential plc of the United Kingdom. Eastspring Investments companies (including JV’s) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America.