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Gold! Gold! Gold from the Japanese River

The picks and shovels of the semiconductor industry

Annabelle Miller
Annabelle Miller

The first rumours of the California Gold Rush of 1848 were confirmed by a San Francisco newspaper publisher and merchant, Samuel Brannan. Brannan held a vial of gold walking through the streets shouting, ‘Gold! Gold! Gold from the American River’. Levi Strauss emerged from this period as one of the most successful merchants. His fortune was made not from prospecting but through the sale of riveted-pocket work pants or jeans as we know them today. Strauss also sold picks, shovels and wheelbarrows.

The gold rush today is in the semiconductor industry, as society rides the next wave of productivity unleashed by Moore’s Law. The progression of Moore’s Law toward more powerful semiconductors is driving a Cambrian explosion in new applications with the benefit of reduced power consumption. We have taken a leaf out of the Levi Strauss playbook and looked for opportunities among the picks and shovels of the semiconductor sector. The semiconductor capital equipment companies are beneficiaries of the growth in industry capital expenditure allocated towards the advancement of Moore’s Law but do not carry the same degree of technological risk or product failure. 

The testing equipment companies are an overlooked part of the semiconductor capital equipment industry. This part of the value chain exhibits many of the qualities we look for - a concentrated market structure and a mission critical piece of equipment ingrained in a portion of the value chain that will grow over time. Advantest emerged as one of our preferred ‘shovels’. 

Why are semiconductors tested?

The testing process is critical in the semiconductor manufacturing process as it is used to identify defective semiconductors. Semiconductor manufacturers view it as a critical process to ensure devices operate as designed particularly in end applications with zero-defect tolerance such as automotives and medical devices. Semiconductor test is a critical process used to improve semiconductor yields. Yield is the most important factor in overall wafer processing costs. Incremental increases in yield significantly reduce manufacturing costs. Advantest test equipment is critical to providing feedback to improve customer manufacturing processes. 

What is driving structural growth in semiconductor test?

With each process node transition, there is a ~50% increase in testing intensity. This is supported by innovations in advanced packing and new materials as progression of Moore’s Law reaches its practical limits. 

Advantest is a key beneficiary given its approximately 60% share in logic testers courtesy of the Verigy platform, V93000, with a global installed base of 10,000 testers. The V93000 is essentially  a powerful computer used to test another powerful computer.  

The growth in test intensity is underpinned by greater semiconductor complexity and an increase in testing requirements as production is scaled to meet market demand. This advantage can clearly be seen in the demand for test engineers on job sites requiring specific knowledge of Advantest hardware and software. 

The TSMC roadmap gives a good indication of the advanced node progress over the next several years. New applications designed on TSMC’s up and coming node, N3, are being driven by AMD, Nvidia and Ampere, all of which are using Advantest equipment.

What is the competitive advantage?

There are high barriers to entry and customer lock-in due to standardisation of test software toolchains of Advantest and Teradyne. Advantest products are often developed alongside customer’s innovations. With each node migration (28 nm, 7 nm, 5nm, 3 nm) and technology shift (RF, mmWave, SiC, GaN, FinFET, GAA) Advantest V93000 adds new testing functionality. 

The core tester is compatible and upgradeable as new testing functionality develops. This enables customers to add additional features with minimal additional floor space required. The existing trove of software code can be used on subsequent product generations. Advantest becomes interwoven into the customer’s product roadmap locking future growth from new customer products.

In the course of our due diligence, we looked at the challenges a large multi-billion dollar semiconductor manufacturer faced with a competitor testing platform. It had many technical challenges which resulted in poor uptime performance and lost revenue. Poor customer service led the customer to engage Advantest. Advantest offered to take some of the high-volume products and write the test program conversion at no charge. This superior customer service and product performance resulted in the customer growing to be a US$100m+ account for Advantest. 

Advantest is only as successful as their customers

At ECP, we look for companies with Sustainable Competitive Advantages in structurally growing markets. The close relationship with the end customer from the beginning of the product development journey underpins Advantest’s SCA. Testing is mission critical for developing semiconductors with zero defects. Advantest stands to benefit from the success of a diverse set of customers including Nvidia and AMD, without the same degree of technological risk or product failure.

The article has been prepared by ECP Asset Management Pty Ltd (ECP). ECP is a funds management firm based in Sydney, Australia. For further information, visit www.ecpam.comThis material has been prepared for informational purposes only and is not intended to provide and should not be relied on for financial advice. ECP and the author own shares in Advantest Corporation. ABN 26 158 827 582, AFSL 421704, CAR 44198.

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