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January 23, 2019
American Funds video transcript: “No end in sight for the semiconductor revolution”
Mike Utley: So, let’s start with your big picture overview of the semiconductor industry. Who are the major players, what drives share prices and, after a fairly difficult 2018, what's your broad outlook for the sector in 2019 and beyond?
Isaac Sudit: When I think of electronics, it's a 50-year-old revolution that we have had, probably since the invention of the integrated circuit. We can go back farther, to the invention of the transistor in the 1950s. And this revolution is comparable in terms of magnitude and scale to the Industrial Revolution —
Mike Utley: Absolutely.
Isaac Sudit: — that started in England and then propagated through the world. So, semiconductors are drivers of this revolutions that has changed the world, has changed the way we live, has improved lives for humanity.
You know, 50, 60 years is a long time, and the industry is maturing. The industry has consolidated quite a bit, both individually and, actually, geographically. In the U.S., we have Intel as probably the name that most people are familiar with [in] semiconductors, and [it’s] still a major player. We have Texas Instruments, which is also one of the founding members of the semiconductor revolution globally. In Asia we have Taiwan Semiconductor, which is the largest manufacturer of semiconductors in the world. In Korea we have Samsung Electronics, which besides being a smartphone supplier is also a major manufacturer of semiconductors. Europe used to be a very large center of semiconductor, both design and manufacturing. It has declined over the last, say, 25 years. But it has several key companies that provide equipment for the manufacture of semiconductors. One of them is ASML —
Mike Utley: Right.
Isaac Sudit: — in Holland. Mainland China is trying to become a major participant in the semiconductor industry. So far, I think that we have not seen a major semiconductor company coming out of China, but I think it's just a matter of time for them to be significant players.
Mike Utley: Can you give us a little bit of your opinion on short term, where you see this market going? And then your long-term, sort of 10-year view?
Isaac Sudit: The industry had been running rather hot for maybe a couple years, and now we're going to just kind of cool down things a little bit. There's been too much capacity added at the end of the cycle — which was last year — and therefore now we're going to enter a downturn.
Now, the magnitude of the downturn is up for controversy and for discussion. And my analysis through, I would say, the last 20 years, is that this downturn is probably going to be milder than most people expect. The industry is in much better health than it has been in a couple of decades, and it's more concentrated. So, I think when I look at the red flags that suggest a cyclical downturn, they're raised but very timidly. So, I don't expect a downturn to either last long or be very deep.
Mike Utley: What's your longer term view? What do you think the catalysts are for growth in the years ahead?
Isaac Sudit: I'm very optimistic about the sustainability of growth in the semiconductor industry, albeit slower growth than we have seen over the last 20 years. Semiconductors are the enablers of many of the other industries that are in everybody's minds. We think of great companies like Facebook, like Google, like Amazon, like Microsoft, like Baidu and Tencent in China. And Alibaba as well. And these are companies that are monetizing our daily lives in different ways than we [are] used to. Some of them are replacing old ways of how our life was being monetized.
And semiconductors are the drivers of that — the equipment that allows these companies to search; to provide advertising; to provide recommendations; to display images, sounds, video; to keep track where we are; to provide information instantaneously. All that is enabled by semiconductors. So, that will continue.
The second thing that I think will be a driver of growth will be penetration of semiconductors in areas that have not had historically such high exposure to the technology as, say, personal computers.
Mike Utley: Right.
Isaac Sudit: We're seeing that in automotive. But there's quite a bit of room to go in automotive, believe it or not.
Mike Utley: Sure.
Isaac Sudit: Medical is another area where there is a lag between what can be done and what's being done. And of course, that makes sense. It's a fairly regulated industry. It's an industry where failure has tremendous consequences. And automotive, by the way, is another similar industry regulated, where failure has consequences. These industries take longer for semiconductors to penetrate fully. But that is going to happen.
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