Overview Of The Semiconductor Capital Equipment Industry (2023)

The following article is an excerpt from a recent Premium Edition of the True Vine Letter.


If you do not know anything about semiconductors and you listen to a presentation by a semiconductor capital equipment company, you will quickly be lost. I know because I was there before. Management continuously rattles off terms like logic, foundry, DRAM, NAND, fab, wafer, etc. I said to myself, “what are these guys talking about?!?!” Eventually, I had to do a deep dive into the industry to understand it which included reading an entire book about it.

The semiconductor industry manufacturers integrated circuits (“chips”) for a variety of electronics, including computing devices, network equipment, and storage devices. The rise of new technological advancements such as autonomous vehicles, big data analytics, edge computing, immersive devices (e.g., virtual reality), internet of things, machine learning, robotics, and so on are not only requiring more chips but continually more advanced chips. This is good business for companies who make the equipment to advance chip technology. Furthermore, China is investing aggressively in all these new technologies which also is increasing the demand for semiconductor equipment.

More Data = Semiconductor Growth Opportunity

The following presentation slide shows the broad opportunity set for the semiconductor industry in this new “data” era:

source: KLA-Tencor NASDAQ 39th Investor Conference presentation

This slide shows the expected revenue growth out to 2025 for the end markets of the semiconductor industry:

source: ASML presentation, Gartner

You can see from this slide that the No. 1 growth driver for the semiconductor industry is servers, datacenters and storage which is being driven by the rise of cloud computing.

These growth drivers are adding up and semiconductors are increasingly becoming a larger part of the world economy, as this slide shows:

source: Lam Research investor presentation, WSTS, IMF

Semiconductors are an important growth business and semiconductor capital equipment is an essential sub-industry worth understanding.

Chip Types

At a high level, there are two types of chips that are commonly produced by semiconductor manufacturers like Intel (INTC), Micron (MU), Samsung (OTC:SSNNF, OTC:SSNLF), SK Hynix (OTC:HXSCF; OTC:HXSCL), and Taiwan Semiconductor (TSM). These are memory and logic. Let's take a look at each of these.

Memory chips are used to store data electronically in the form of bits (8bits = 1 byte). The most common types of memory chips made by the industry today are Dynamic Random Access Memory ("DRAM") and NAND flash. DRAM is volatile memory, which means it temporarily stores each bit of data in a separate capacitor while the associated device is powered on. DRAM is commonly used by data servers and mobile devices. NAND (short for NAND flash) is non-volatile memory ("NVM"), which means it stores data even if the power is switched off. It's called NAND because it's a type of memory that resembles the NAND (not-and) logic. NAND is commonly used in memory cards and solid state drives ("SSD"). The major trend in memory today is the switch to three-dimensional (3D) memory where memory cells are built vertically, instead of horizontally (planar), which increases memory bit density.

Logic chips are the fundamental building blocks for digital electronics. Logic chips are constructed from connecting individual digital logic gates that perform logical operations of AND, OR and NOT on binary numbers. (This is where the NAND or not-and comes from). Logic chips perform calculations that drive computer processing.

Semiconductor manufacturers are generally focused on designing chips for various device applications. The semiconductor capital equipment industry (“semi-cap” for short) provides the equipment for these manufacturers.

The semiconductor industry is to electronics what the mining industry is to finished metal products. Taking this one step further, the semi-cap industry supplies the“picks and shovels” for the broader semiconductor industry.

Chip Manufacturing

Chips are constructed from wafers of silicon in the clean rooms of fabrication facilities (“fabs”). These wafer fabs are sometimes referred to as the “front end” of the production process. Fabs are very expensive to build because these clean rooms are something like 1,000 times cleaner than a regular room with constant air circulation so that no speck of dust gets on the wafers.

Here's how KLA-Tencor (KLAC) described the semiconductor fabrication process in their most recent annual report:

The semiconductor fabrication process begins with a bare silicon wafer — a round disk that's typically 200 millimeters or 300 millimeters in diameter, about as thick as a credit card and gray in color. The process of manufacturing wafers is in itself highly sophisticated, involving the creation of large ingots of silicon by pulling them out of a vat of molten silicon. The ingots are then sliced into wafers. Prime silicon wafers are then polished to a mirror finish. …

The manufacturing cycle of an IC is grouped into three phases: design, fabrication and testing. IC design involves the architectural layout of the circuit, as well as design verification and reticle generation. The fabrication of a chip is accomplished by depositing a series of film layers that act as conductors, semiconductors or insulators on bare wafers. The deposition of these film layers is interspersed with numerous other process steps that create circuit patterns, remove portions of the film layers, and perform other functions such as heat treatment, measurement and inspection. Most advanced chip designs require hundreds of individual steps, many of which are performed multiple times. Most chips consist of two main structures: the lower structure, typically consisting of transistors or capacitors which perform the “smart” functions of the chip; and the upper “interconnect” structure, typically consisting of circuitry which connects the components in the lower structure. When all of the layers on the wafer have been fabricated, each chip on the wafer is tested for functionality. The wafer is then cut into individual chips, and those chips that passed functional testing are packaged. Final testing is performed on all packaged chips.

There are three primary aspects to manufacturing chips at the front end. These are deposition, lithography, and etch and clean. All three of these aspects require process control. At a very high level, this is how it works:

  • Layers of insulating or conducting materials (chemicals) are sprayed or deposited onto a silicon wafer during deposition. The most commonly used deposition solutions used are (1) atomic layer deposition ("ALD"), (2) epitaxy, and (3) variations of vapor deposition.
  • Inside a Step-and-Scan system (or stepper), special lights (similar to lasers or x-rays) are shined through a photomask to transfer designs developed by engineers unto the wafer during lithography.
  • Some of the material on the wafer is etched away to create desired patterns during the etching and the unwanted materials are removed during the clean process.

These processes are repeated to create the chips on the wafers before elements are finally added to form transistors. Throughout these processes, process control equipment is used for inspection and metrology (measurement) to remove defects and increase yields (i.e., increase the number of usable chips).

Deposition, lithography, etch and clean, and process control are the primary component categories of wafer fabrication that the semi-cap companies specialize in making equipment for. Roughly 85% of the capital expenditures made by chip manufacturers for semiconductor equipment goes toward wafer fabrication equipment (WFE). Thus, most of the semi-cap industry conversation revolves around the main producers of wafer fab equipment.

The WFE market is now primarily concentrated into the hands of just a few companies: Applied Materials (AMAT), ASML (ASML), KLA-Tencor, Lam Research (LRCX), Tokyo Electron (OTCPK:TOELF; OTCPK:TOELY), Screen Semiconductor (OTC:DINRF; OTC:DINRY), and Hitachi High Tech (OTC:HICTF).

  • In deposition, Applied Materials has the leading share (~50%), followed by Lam Research and Tokyo Electron.
  • In lithography, ASML focuses on the high end and has a dominant share (~75%+), followed by Nikon (OTCPK:NINOF; OTCPK:NINOY) and Canon (CAJ). These three companies control almost the entire lithography market.
  • In etch, Lam Research has the leading share (~57%), followed by Tokyo Electron and Applied Materials.
  • In process control, KLA-Tencor is the dominant player (~55% share).

(Note: these market share estimates came from my April 2016 article and have been updated based on more recent company reports and presentations.)

In 2017, WFE capex crossed the $50 billion threshold for the first time, as shown on the left-hand side of the following slide:

source: KLA-Tencor NASDAQ 39th Investor Conference presentation, Gartner

The remaining 15% of the semi-cap industry capex comprises the“backend” of chip production which includes testing wafers, cutting the wafers into chips, and packaging the chips. The primary 2 components of the back end where semi-cap companies also compete can best be described as test and packaging.

There are three categories of chip manufacturers that buy equipment: Logic, memory, and foundry. Here's what each of these categories represents:

  • Logic represents companies manufacturing their own logic chips in their own factories.
  • Memory represents companies manufacturing their own memory chips in their own factories.
  • Foundries are companies with large fabs that produce multiple chips for multiple companies who do not want to manufacture their own. Taiwan Semiconductor Manufacturing Company is the largest foundry in the world.

Semi-cap companies reference these three types of customers in their financials and other investor materials.


I hope you found this overview of the semiconductor capital equipment industry helpful. Semi-cap companies are the behind-the-scenes producers of the tools used to create the building blocks that underpin the new technologies of our modern era. They provide a unique outlet for investing in the technology sector.

Important Disclosure

I'm an investment advisor and owner of True Vine Investments, a Registered Investment Advisor in the State of Pennsylvania (U.S.A.). I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption.

Any investment advice or recommendations involving securities referenced in this article is general in nature and geared towards a readership of sophisticated investors. This article does not involve an attempt to effect transactions in a specific security nor constitute specific investment advice to any particular individual. It does not take into account the specific financial situation, investment objectives, or particular needs of any specific person who may read this article. Individual investors are encouraged to independently evaluate specific investments and consult a licensed professional before making any investment decisions.

All data presented by the author is regarded as factual; however, its accuracy is not guaranteed. Investors are encouraged to conduct their own comprehensive analysis.

Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment advisor.

This article was written by

Joshua Hall




Investment advisor and author of the True Vine Letter. The True Vine Letter is an insightful investing newsletter that also offers Premium content focused on portfolio strategy and coverage of Sprawling Vines--stocks that continue to thrive and compound for an extended period of time.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: KLAC is a holding in client portfolios. I have an economic interest in the stock.


What is capital equipment in semiconductor industry? ›

The semiconductor capital equipment are classified as back end or front end. Front end semiconductor capital equipment involves various functions such as etching, photolithography, ion implantation, deposition, cleaning, chemical & mechanical polishing and silicon wafer fabrication.

What is the outlook for semiconductor capital equipment? ›

After registering robust 30% growth in 2021, semiconductor test equipment market sales are forecast to slip 2.6% to $7.6 billion in 2022 and 7.3% to $7.1 billion in 2023.

How would you describe a semiconductor industry? ›

The semiconductor industry is the aggregate of companies engaged in the design and fabrication of semiconductors and semiconductor devices, such as transistors and integrated circuits. It formed around 1960, once the fabrication of semiconductor devices became a viable business.

Is the semiconductor industry capital intensive? ›

Worldwide semiconductor production is knowledge- and capital-intensive, highlights an analysis released by the European Parliament.

What are the five components of capital equipment? ›

5 Attributes of Capital Equipment
  • 1.) Acquisition Cost.
  • 2.) Not Disposable or Consumable.
  • 3.) Stand Alone.
  • 4.) Useful Life of One Year or More.
  • 5.) Qualifies as Tangible Property.

What is capital equipment industry? ›

Capital equipment refers to a group of industries and a wide range of products that play a key role in materials usage and value creation like healthcare systems, renewable energy, mobility, semiconductors amongst others.

Who is leading the semiconductor industry? ›

In 2021, Samsung retook market leader position with regards to global semiconductor sales with a sales volume of about 83.09 billion U.S. dollars. Intel ranked second, generating 75.55 billion U.S. dollars from the sale of semiconductors during 2021.

What are trends in the semiconductor industry? ›

According to McKinsey, this market will grow from USD 42 billion in 2021 to USD 125 billion in 2030, at a high CAGR of 13%. The growth momentum includes power control, central control, environmental perception, Internet of Vehicles, audio and video, AI functions, and so on.

Which is the largest semiconductor company by market cap? ›

Largest semiconductor companies by market cap
3Samsung 3005930.KS🇰🇷 Korea
4Broadcom 4AVGO🇺🇸
56 more rows

What is the most capital intensive industry? ›

The energy industry is one of the most capital-intensive and requires large capital expenditures. Energy companies can be subdivided into companies that produce energy and those that supply it. Oil, gas, and coal firms are among the most well-known producers.

Which industries rely most on semiconductors? ›

Semiconductors are an essential component of electronic devices, enabling advances in communications, computing, healthcare, military systems, transportation, clean energy, and countless other applications.

Why are semiconductor stocks struggling? ›

Fears of a global recession and weaker consumer spending habits have led to companies reducing expenditures for innovative semiconductor products across various markets.

What is the long term outlook for semiconductor stocks? ›

Based on a report from Fortune Business Insights, the global semiconductor industry is expected to more than double in size from $527.9 billion to $1.38 trillion between 2021 and 2029. This means chipmakers have the potential to be fantastic long-term investments.

What is the future of semiconductor industry? ›

The global semiconductor industry is anticipated to grow to US$1 trillion in revenues by 2030, doubling in this decade. This growth is expected to require investment in high-end advanced wafer manufacturing materials, equipment, and services—but also in the back-end AT solutions and services.

What are the categories of capital equipment? ›

There are two main types of Capital Equipment; Capital Assets (such as a Microscope) and Fabrications (such as an optical set-up consisting of many components).

What is an example of capital equipment list? ›

Examples of fixed capital equipment items are: plumbing fixtures, heating and electrical equipment, built-in shelves and cabinets, and inlaid carpeting.

What is the importance of capital equipment? ›

Importance of Capital Goods in the Economy

If a business is unable to produce goods due to the lack of equipment, then it cannot compete in the market. Capital goods play a vital role in increasing the production of goods in the long term, or in other words, it increases the production capacity of goods and services.

Why do companies invest in capital equipment? ›

Pros of Capital Investments

However, most companies embark on capital investments for productivity. By investing in new equipment or technology, companies can improve their efficiency, thus lower costs and increasing output. These types of investments may also improve the quality of goods produced.

What are the benefits of capital equipment? ›

Leasing capital equipment:
  • Lowers upfront costs, compared to buying equipment outright.
  • Reduces the chance that your company gets stuck with obsolete equipment, if your contract specifies upgrades.
  • Transfers the cost of equipment maintenance to the leasing company, again according to the terms of your contract.

How big is the US semiconductor industry? ›

The market size, measured by revenue, of the Semiconductor & Circuit Manufacturing industry is $61.5bn in 2023. What is the growth rate of the Semiconductor & Circuit Manufacturing industry in the US in 2023? The market size of the Semiconductor & Circuit Manufacturing industry is expected to decline -4.6% in 2023.

Who is the largest producer of semiconductor chips in the world? ›

Which country is the largest producer of chips? China leads the production of semiconductor chips in the world, according to data from the United Nations.

What is the difference between semiconductor and chip? ›

A silicon chip is a very small piece of silicon that contains integrated circuits. It is part of a computer or other electronic device. Semiconductor (semiconductor) refers to a material whose conductivity is between that of a conductor and an insulator at room temperature.

What are examples of capital equipment? ›

Examples of fixed capital equipment items are: plumbing fixtures, heating and electrical equipment, built-in shelves and cabinets, and inlaid carpeting.

What are the semiconductor equipment? ›

Semiconductor manufacturing equipment is used to manufacture semiconductor wafers, IC chips, memory chips, circuits, and others. Silicon wafer manufacturing equipment is used in the early stages of the manufacturing process.

What equipment is needed for semiconductor manufacturing? ›

Assembly equipment include wafer backgrind systems, wafer saw equipment, die attach machines, wirebonders, die overcoat systems, molding equipment, hermetic sealing equipment, metal can welders, DTFS machines, branding equipment, and lead finish equipment.

What is a capital equipment list? ›

A capital equipment list is a written compilation of all of the equipment you will need to operate your business. If you've already written a business plan, this may seem like a superfluous or redundant item; however, having this list may help keep you financially in line as you embark on your new business.

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