But despite all this talk about chips and semiconductors, few understand how the industry is structured. I’ve found the best way to understand something complicated is to diagram it out, step by step. So here’s a quick pictorial tutorial on how the industry works.
Looking at the figure below, the industry seems pretty simple. Companies in the semiconductor ecosystem make chips (the triangle on the left) and sell them to companies and government agencies (on the right). Those companies and government agencies then design the chips into systems and devices (e.g. iPhones, PCs, airplanes, cloud computing, etc.), and sell them to consumers, businesses, and governments. The revenue of products that contain chips is worth tens of trillions of dollars.
If you were able to look inside the simple triangle representing the semiconductor industry, instead of a single company making chips, you would find an industry with hundreds of companies, all dependent on each other. Taken as a whole it’s pretty overwhelming, so let’s describe one part of the ecosystem at a time. (Warning – this is a simplified view of a very complex industry.)
The semiconductor industry has seven different types of companies. Each of these distinct industry segments feeds its resources up the value chain to the next until finally a chip factory (a “Fab”) has all the designs, equipment, and materials necessary to manufacture a chip. Taken from the bottom up these semiconductor industry segments are:
The following sections below provide more detail about each of these eight semiconductor industry segments.
So far our chip is still in software. But to turn it into something tangible we’re going to have to physically produce it in a chip factory called a “fab.” The factories that make chips need to buy specialized materials and chemicals:
It’s getting much harder to build chips that are denser, faster, and use less power, so what’s next?
Controlling advanced chip manufacturing in the 21st century may well prove to be like controlling the oil supply in the 20th. The country that controls this manufacturing can throttle the military and economic power of others.
An industry that previously was only of interest to technologists is now one of the largest pieces in great power competition.