VACUUM COULD BECOME MORE EXPENSIVE

STOCK MARKET ANALYSIS

It is now a truism to say that the semiconductor industry is the keystone of global technological innovation. Chips are at the heart of almost every modern electronic device: from computers to smartphones, cars, the Internet of Things, and artificial intelligence. Over the past five years, following a trend that began in 2013, the semiconductor sector has outperformed the main indices by a factor of two (see Fig. 2). Nvidia's share price has more than tripled in 2023 (+238%) and is already up by a further +46% in 2024 (see Fig. 3).

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1. Governments and companies invest massively

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The rise of artificial intelligence has accentuated the need for high-performance computing and energy efficiency. In addition, previous supply chain disruptions have highlighted the strategic importance of semiconductors for both economic growth and national security. Faced with strong demand, the growing complexity of manufacturing technologies and the need to secure production, purchasing and transport, the main players in the market are in the process of turning a decisive corner.

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The industry giants, mainly American and Taiwanese, such as Nvidia (NVDA US), Broadcom (AVGO US), AMD (AMD US) and TSMC (2330 TT), continue to dominate the market thanks to their lead in research and development. This spending enables them to overcome technological barriers and achieve ever finer and higher quality manufacturing processes. For these leaders, the main risks are that they will not be able to keep up the pace of innovation needed to maintain their market share, or that the industry will be reorganised differently, particularly if some buyers start producing their own chips.

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The recent initiative by OpenAI (unlisted), the developer of ChatGPT, to invest heavily in the semiconductor sector is a telling example. The artificial intelligence systems on which it is based, in particular neural networks, require gigantic computing power. This generates substantial demand for specialised chips, such as GPU/TPU (Graphics/Tensor Processing Units) processors and accelerators. By raising funds in the Middle East and outsourcing the construction and operation of future US plants to TSMC, Sam Altman's company could achieve a dual objective: accelerate its deployment while reducing operational risks.

The OpenAI project is not isolated in the global landscape, and several governments have already taken steps to ensure their access to chips. Americans and Europeans are seeking to catch up with Asia, which currently produces 82% of the world's semiconductors. With a 22% market share, Taiwan is a key player.

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Although it appears to be on a par with South Korea and China, it is less easily substitutable as it produces 92% of the latest generations of chips (see Fig. 4). To revitalise its semiconductor industry, the United States has initiated proactive legislative measures from 2022, with the Chips Act. This type of initiative could be stepped up after the next presidential election in November 2024.

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The European Union, with its homonymous European Chips Act (ECA), adopted at the end of 2023, is also demonstrating its desire to develop its own capacities by manufacturing more semiconductors on the Old Continent. Germany should be at the heart of this plan, as it will be home to the largest processor plants. Between now and 2027, TSMC intends to set up its first European site in Dresden, in the east of the country, in partnership with the Netherlands' NXP (NXPI US) and Germany's Infineon (IFX GY) and Bosch (unlisted). In France, Franco-Italian manufacturer STMicroelectronics (STMPA FP) will set up a new plant in Crolles, near Grenoble. For the time being, these three stocks have not yet generated any enthusiasm among investors (see Fig.5).

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2. The shadow of military intervention in Taiwan

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A few weeks after the presidential election in Taiwan and the victory of independence candidate Lai Ching-Te, China reiterated that it considers the island to be part of its territory and that it has never given up the option of using force to regain control of it. The Chinese army regularly communicates that it will "crush" any hint of independence from Taiwan. In recent years, it has regularly deployed observation balloons, fighter planes and warships around the island.

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These recurring geopolitical tensions pose a significant risk for the semiconductor industry. In light of the fact that 50% of the containers transported in the world pass through the strait separating Taiwan from China, any military disruption in this region would lead to shortages of semiconductors and increase their production costs. This prospect once again raises questions about the world market's dependence on a small number of manufacturers and the need to diversify semiconductor production to ensure continuity of supply. Even though the United States and Europe are working hard to produce more chips on their territory, this rebalancing will only be fully effective in several years' time, and the latest-generation products, which are the most sought-after, are still mainly produced in Taiwan.

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The prospect of armed conflict in Taiwan is providing a 'peace dividend' for some non-Taiwanese companies, both in North America and South Korea. Companies such as Intel (INTC US), GlobalFoundries (GFS US) and Samsung Electronics (005930 KS) are now seen as safer alternatives by customers seeking to diversify their sources of supply (see Fig. 6).

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3. Sellers of shovels, picks... but also handles

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Behind the semiconductor manufacturers are the suppliers of dedicated equipment. Among the well-known companies are ASML (ASML NA), Applied Materials (AMAT US), and Lam Research (LRCX US), which supply the machinery and technology needed to produce semiconductors, from the etching of circuits to the deposition of various materials on silicon wafers. Their stock market performances are closely correlated (see Fig. 7).

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Even further in the background, the companies that supply vacuum pumps and fluid control technologies are keeping a low profile. Less mentioned by analysts and therefore less followed by investors, they are nonetheless important. They are just as essential in meeting the semiconductor industry's demands for precision and purity, particularly in clean rooms. Without these companies, it would be impossible to ensure the conditions necessary for the production of high-quality chips. Better still, the desire to locate part of the world's semiconductor production outside Taiwan is creating a real success story for these companies. During the gold rush, it wasn't the gold diggers who made their fortunes, but the shovel and pickaxe dealers and, before them, the handle suppliers.

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Pumps are essential for creating the necessary vacuum in deposition and etching chambers. By avoiding contamination and reaction with atmospheric air, they guarantee the quality of semiconductor manufacturing at nanometric scales. Valves, meanwhile, regulate the flow of gases and liquids in production equipment with extreme precision, ensuring the repeatability and reliability of manufacturing processes. Pumps and valves are one of the biggest items of expenditure in the materials nomenclature for semiconductor equipment manufacturers. The companies that manufacture them have to continually meet very high demand. Their order books are filled for several years.

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Several players dominate the semiconductor vacuum pump market (see Fig. 8), including Sweden's Atlas Copco (ATCOA SS), Germany's Pfeiffer (PFV GY), and Japan's Ebara (6361 JP) and Ulvac (6728 JP):

• Atlas Copco integrated Edwards Vacuum and Oerlikon Leybold Vacuum in 2014 and 2016 respectively. Leybold is a renowned vacuum technology manufacturer with over 160 years of experience. Similarly, Edwards is a world-renowned provider of vacuum and emission control solutions. Atlas Copco has acquired both companies to strengthen its leading position in the lucrative semiconductor materials and equipment segment. Its broad product range and global presence have contributed significantly to its growth in recent years.
• Pfeiffer Vacuum is a major player in the semiconductor pump market. Founded in 1890, the company has a long history of providing vacuum solutions. With a focus on innovation and quality, Pfeiffer has experienced significant growth in the global market for high performance pumps.

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• Ebara specialises in the design, development, and manufacture of vacuum pumps for semiconductors. The company focuses on research and development to provide state-of-the-art solutions.
• Ulvac supplies a wide range of vacuum pumps, as well as valves and gas analysers, leak detectors and surface profile measurements.

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In this industrial context of a race for quality and performance, companies specialising in fluid control have become essential. Their ability to innovate, by developing more precise valves and more reliable control systems, enables semiconductor manufacturers to produce more, to push the limits of miniaturisation, while improving purity standards. Not only do these suppliers increase the industry's production capacity, but they also facilitate the emergence of future generations of semiconductors.

Among the world leaders in fluid control are Japan's SMC Corporation (6273 JP), and Switzerland's VAT Group (VACN SW) and Inficon (IFCN SW) (see Fig. 9):

• SMC Corporation manufactures valves and fluid controllers. Although the company supplies various industrial sectors such as automotive, packaging and healthcare, a significant portion of its business is dedicated to the semiconductor industry. Their technology is crucial for optimising energy consumption and improving the efficiency of manufacturing processes.
• VAT Group specialises in the design, manufacture, and marketing of vacuum valves, mainly for the semiconductor industry. Their products play a key role in the management of vacuum environments for lithography and materials deposition, for example.
• Inficon offers advanced solutions for vacuum measurement and leak detection, essential for ensuring process integrity and purity in semiconductor manufacturing. Their high-precision instruments enable rigorous control of production conditions, thereby guaranteeing the quality of chips.

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Conclusion:

Investors cannot ignore the semiconductor sector, but they may end up looking for companies with a low profile and whose share prices have not yet soared (see Chart of the Week). Among suppliers of materials and equipment, manufacturers of vacuum pumps and valves appear to be in a good position. They are essential to chipmaking, and their order books are filled for several years.

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