“I’ve never seen a better time for this industry,” said Mark Edelstone. “Chips are cool again.”
Edelstone, who is chairman of global semiconductor investment banking for Morgan Stanley, and has some 30 years of experience in the chip business, was speaking on a panel at the annual semiconductor forum held (virtually this year) by startup incubator Silicon Catalyst. He was not alone in his assessment.
“The market is hot,” said fellow panelist Ann Kim, managing director and head of the frontier technology group for Silicon Valley Bank. “There is a strong funding environment and the cost of capital is low. Venture capital funds have over $150 billion of dry powder. Companies in semiconductor space are raising massive growth rounds…[and] semiconductor entrepreneurs should be attacking the market right now.”
The reason for such a sunshiny outlook? Surprisingly, it’s due in large part to winds that changed as a result of the coronavirus storm.
Said Edelstone: “The shift to the cloud and work from home are significant trends right now, catalyzed by COVID.”
Both are fueling demand for semiconductors, he indicated—in particular, acceleration of the move by companies from their own computer infrastructures to cloud services will continue post-pandemic. “We are only about 10 percent of the way there in terms of what can move to the cloud.”
The fact that the pandemic has proven to be more of a boost than a drag on semiconductor industry fortunes was not exactly expected.
Said Jodi Shelton, cofounder CEO of the Global Semiconductor Alliance: “I don’t think any of us anticipated how well things would hold up. People [initially] talked about a lot of cost-cutting, but by May and June, the attitude changed.”
“The pandemic has been toxic for the economy,” she said, “but Nasdaq and the Dow hit records, there are record deals, record amounts of money being raised….You wouldn’t know we are in a pandemic if you look at those numbers.”
Discussing the pandemic pause and the future of the semiconductor industry are (clockwise from top left) Don Clark, Mark Edelstone, Jodi Shelton, and Ann Kim.
The (Brief) Pandemic Pause
Kim also reported that the initial fears by semiconductor company leaders were short-lived. “We spoke to the VC-backed companies that we work with at the beginning of sheltering in place,” she said. “There was definitely a pause. Management teams had to take a fresh look at their runways; people rushed to the capital market to close equity rounds. But then they realized that debt is available and cheap, and they can use debt as a safety blanket.”
“We thought we would see a U-shaped curve,” said Edelstone. He was referring to a rapid drop and then a slow period for semiconductor companies before a recovery—one that would be “easier to come out of than the dot-com crash.”
“But to see how it has shot up has been amazing,” he said.
Contributing to that extremely short pause and quick turnaround has been the ability of the semiconductor industry to pivot to remote work, a more daunting challenge than the adjustment faced by the software-centric tech companies.
“The thing that has impressed me the most is just how productive everybody has been,” Edelstone said. “All of our companies in our industry are operating virtually, designing these complex devices and taping them out relatively on schedule. It has been incredible to watch the resiliency that technology has been able to deliver.”
Industry executives had been somewhat worried that the boom was due to inventory stockpiling, and were concerned that either manufacturing issues due to the virus or trade issues with China would cause the companies that use semiconductors in their products to order more devices earlier, panelists reported. But that seems to not be the case. Said Shelton: “It seems a lot of inventory has been burned off.”
The China Question
Those trade issues still form the hint of a cloud on the horizon, panelists indicated. “Things with China may likely get worse before they get better,” said Shelton. And the tensions between the U.S. and China could spread to Taiwan, affecting TSMC. With TSMC being such a dominant manufacturer in terms of both technical capabilities and market share, any disruption there would ripple throughout the entire industry.
So, said Shelton, the question is, “Can we reset the relationship with China, dialing down the rhetoric and moving towards a solution? The Biden administration will have pressure placed on it to remain tough on China. And we have six weeks more of the Trump administration; there are things they could do [with regards to China] that would be hard to undo.”
Beyond the COVID Era
After the pandemic, when the world settles back to normal—or a new normal—what will the chip industry look like? That was the question posed by moderator Don Clark, a New York Times contributing journalist.
Said Shelton: “We are very optimistic about the future. The industry has a lot of room to grow.”
But the way the industry grows may be different than it has in the past, with semiconductor companies competing with each other to create the most powerful or lowest-power processors.
Instead, said Edelstone, “I think we will increasingly see semiconductors as a core competency for companies. They start with software, develop a chip to drive it, and go to market as a systems company.”
Consider Nvidia, he said. Even 10 years ago, “[Nvidia CEO] Jensen [Huang] would have said that it is not a semiconductor company, it is a full stack, end to end, solution provider. That is where the future is going to be,” not, he indicated, in bringing a $10 product to market as a standalone semiconductor company.
Tekla S. Perry is a senior editor at IEEE Spectrum. Based in Palo Alto, Calif., she's been covering the people, companies, and technology that make Silicon Valley a special place for more than 30 years. An IEEE member, she holds a bachelor's degree in journalism from Michigan State University.