According to global research and advisory firm Gartner, by October 2020, two-thirds of organisations across the globe had increased or left unchanged their investment into cloud computing and AI. The survey also revealed that by mid-2021, 75% of respondents intended to accelerate new AI projects as part of a post-pandemic “reset” as organisations look to recuperate from the Covid-19 pandemic.
According to Andrew Dittberner, chief investment officer at Old Mutual Wealth Private Client Securities, this advancing interest in digital technology is underpinned by a $500-billion semiconductor industry that, simultaneously, is experiencing critical supply shortages undermining this recovery.
“Semiconductor chips are the engine driving the technological transformation of the world. However, we find ourselves in the very precarious position of relying on just a handful of companies to meet the world’s insatiable appetite and desire for ever faster, more powerful, and smaller semiconductor chips,” he says.
To illustrate, Google Cloud’s Technical Director in the CTO’s Office John Abel, recently said that Google Cloud has found that 76% of senior manufacturing executives are pushing investment into data and analytics, cloud computing and AI – as a direct response to the pandemic. These digital transformation statistics could be repeated across countries and industries such as e-commerce, which in South Africa has doubled in two years, says Dittberner.
“Without semiconductor chips, as forewarned by the ongoing shortage, there would be no machines to drive the information age. However, with a concerted global effort to manage supply and geopolitical risks, massive demand for growth in the semiconductor chip industry will make for attractive investment opportunities for patient investors,” explains Dittberner.
Dittberner is not surprised that demand has outstripped supply. “Everything we associate with digital transformation and the fourth industrial revolution drives demand. This extends from the need for cloud datacentre processing power, the rapid evolution of mobile technology driven by 5G technology, and the Internet of Things.
“This hyper-connected world, augmented by AI and machine learning, becomes a self-fulfilling prophecy. The more technology evolves, the more accelerated demand there is for that technology,” he says.
According to Dittberner, given that demand for semiconductor chips is set to accelerate in the years ahead, it is key to understand the cause of the current shortage to ensure that similar issues do not recur. “Fortunately, a step in the right direction has already been taken by various stakeholders, and significant capital expenditure plans have been put on the table by several companies.”
Dittberner says it is encouraging that these capital expenditure plans expand across geographies, thus ensuring a less concentrated supply chain, lowering the probability of future shortages. Examples of these new projects include TSMC’s $12-billion plan to build a foundry in Arizona and Samsung’s $10-billion plan to build a similar facility in Austin, Texas.
“About 60% of the world’s semiconductors are currently manufactured in the Asia Pacific region, which presents significant geopolitical risk which has been exacerbated by US-China trade tensions,” he explains.
Many manufacturers have needed to curb supply to certain industries to keep pace with others, such as smartphones benefitting at the expense of carmakers. At the same time, the pandemic caused massive supply chain disruptions – ironically coinciding with the demand for remote working and home-schooling – which spiked demand for everything digital overnight.
The semiconductor industry is complex to navigate. From an investment perspective, many dynamics need to be considered, says Dittberner, including deciding which part of the supply chain to invest in and which companies to consider. “Each company is differentiated by its products, with no two companies producing the same products for the same use.”
Dittberner says that identifying a single company that will be a major beneficiary over the long term is incredibly difficult. “For this reason, we have opted to invest in this industry via the iShares PHLX Semiconductor Exchange Traded Fund, which gives us broad exposure across the value chain and across all types of companies and chips,” he says.
“One thing is certain,” concludes Dittberner. “The semiconductor industry as a whole is set to continue its robust growth, and as such it presents an exceptionally exciting opportunity for patient investors.”