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A question regards to the semiconductor value chain

J

jm820428

New member
Dear experts, I have a question regarding the semiconductor market value chain. According to this illustration (below), the semiconductor value chain is derived from seven activities (pre-competitive research/design/frontend/backend/EDA/equipment/material). Each activity is further divided into three major categories: R&D, Capex, and Value add.

While R&D represents research and development, and Capex represents asset investment;

What does Value add represent in the illustration? Any insights on this would be greatly appreciated

Screenshot 2024-04-17 at 3.46.01 PM.png
 
jm820428 said:
Dear experts, I have a question regarding the semiconductor market value chain. According to this illustration (below), the semiconductor value chain is derived from seven activities (pre-competitive research/design/frontend/backend/EDA/equipment/material). Each activity is further divided into three major categories: R&D, Capex, and Value add.

While R&D represents research and development, and Capex represents asset investment;

What does Value add represent in the illustration? Any insights on this would be greatly appreciated

View attachment 1846
Click to expand...

Source?
 
jm820428 said:
I got from the source below, page 13

Click to expand...

Thanks. You can contact the authors to find it out. The diagram from their research and you posted earlier is not clear to me in several aspects. I assume the "value add" in their research means the gross profit of each segment. But their belief on the "Pre-competitive Research" segment adding no value to the semiconductor industry needs to be clarified. Even if the R&D organization is a non-profit institute (such as a university) but it doesn't mean the institution will charge its clients at cost, no extra added. Additionally, IBM semiconductor research division will certainly operate as a for profit entity and has its own gross profit calculation when they provide services to non-IBM customers.


"Antonio Varas is a Senior Partner and Managing Director in the Silicon Valley
office of Boston Consulting Group and is a core member of its Technology,
Media & Telecommunications practice. You may contact him by email at
varas.antonio@bcg.com.

Raj Varadarajan is a Senior Partner and Managing Director in the Dallas office
of Boston Consulting Group and leads its Global Advantage practice in North
America. You may contact him by email at varadarajan.raj@bcg.com.

Jimmy Goodrich is the Vice President, Global Policy at the Semiconductor
Industry Association. You may contact him at jgoodrich@semiconductors.org.

Falan Yinug is the Director, Industry Statistics and Economic Policy at the
Semiconductor Industry Association. You may contact him at fyinug@
semiconductors.org. "
 
Last edited:
The semiconductor supply chain is also a value chain. Each part of the chain adds value to the end product - the finished component sold to an electronics or similar company. The chart shows each link's share of total R&D and of Total Capex. The Value add is the link's share of the total profit made in the entire process. The chart shows that most of the value is created in design phase - (Ask Nvidia about that) and then in the front end manufacturing. The chart shows that 50% of the value (profit) is taken by the design authority, 24% by the front end and 11% by the tools 11% - the last 15% of the profit is shared by the rest. Hope this makes sense.
 
Interesting charts.

This suggests that the most profitable parts of the industry are "Design" and "Equipment and Tools". That makes some sense (US fabless companies, ASML). But it equally implies that "Front End Wafer Fab" and "Back End Assembly and Test" are absolutely the worst. Is TSMC just an outlier is being so profitable here ? And is the "Value Add" from "EDA & IP" really only 4% these days ?

Taken at face value, it's not obvious that throwing $10bns into additional fab investment (CHIPS Act) etc is going to produce a great ROI. Even if it can be argued that it's strategically necessary.

Also, where is the operating expense in this breakdown ? The running cost of a wafer fab (raw materials, salaries, power costs, etc) is arguably not R&D and must be included in the "Value Add" bucket here ?! But why ?

Also, does the "Design" include the development of software and applications support material around SoCs which is an essential part of any such chip ? It's easier to understand why "Design" has such a huge "Value Add" in that case. But challenging to distinguish "Design" as being more productive than "IP" if not.

It would also be interesting to know if these are any historical trends in this data (the report is from 2021).
 
Clausaasholm said:
Front-end manufacturing is the 2nd most attractive area, with 24% value added. Look at what is happening with Nvidia and TSMC here: Is TSMC not invited to the AI party?
The US is already in the lead in design, so investing in the 2nd most attractive area makes sense economically, although the Chips Act is more a question of national security: a-billion-here-and-a-billion-there
Hope this helps
Click to expand...
Perhaps I'm being too simplistic (in working straight off percentages rather than actual values), but don't we need to normalise the Value Add (output) to the R&D and CapEx (inputs ) ? My point was that the Value Add/(R&D + CapEx) ratio was at first glance far less attractive for the manufacturing stuff.
 
R&D and Capex are the tickets to participation in the market and need to be paid upfront. Value is the outcome of a successful investment in R&D and Capex. You need to pay for R&D for typically many years to be allowed to participate but R&D has little impact on today's business. For Capex Investment: You need computers to do IP (small Capex) and Semiconductor fabs to do Fronted (Huge Capex)
 
Clausaasholm said:
The semiconductor supply chain is also a value chain. Each part of the chain adds value to the end product - the finished component sold to an electronics or similar company. The chart shows each link's share of total R&D and of Total Capex. The Value add is the link's share of the total profit made in the entire process. The chart shows that most of the value is created in design phase - (Ask Nvidia about that) and then in the front end manufacturing. The chart shows that 50% of the value (profit) is taken by the design authority, 24% by the front end and 11% by the tools 11% - the last 15% of the profit is shared by the rest. Hope this makes sense.
Click to expand...
Thanks mate, now it makes more sense to look at the chart. Thanks.
 
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