Big Picture: AI Chips

Semiconductor chips are the engines of our digital lives. Fitted with billions of electronic transistors that constitute elaborate integrated circuits, these chips power everything from laptops and mobile phones to smart TVs and automobiles. And the next frontier in this ~$450 billion industry are chips that support artificial intelligence (AI) technologies. These “AI chips” are forecast to comprise up to 20% of the total semiconductor chip market by 2025.

AI—the ability of machines to perform non-routine tasks once thought the preserve of human brains—requires specialized AI chips that are more powerful, more efficient, and optimized for the parallel matrix computation required by advanced machine learning (ML) algorithms. Image recognition, recommendation engines, natural language processing, and autonomous vehicles (AVs) are just some of the use cases that these chips support.

The diversity of AI applications means that AI chips are usually designed for specific functions. Rarely is there a one-size-fits-all solution (see “Inside an AI Chip” for more details), putting a premium not just on chip design but also on access to the sophisticated hardware and advanced manufacturing processes necessary to keep up with demand.

AI chips are crucial ground over which the competition for technology leadership will be fought. Tensions between reducing costs, mitigating risks, and investing in innovation will only deepen with time. Therefore, it is imperative for governments and businesses to understand the complex global interdependencies of semiconductor supply chains.

We begin by examining the market drivers for AI chips.

Rising Demand for AI Chips

The demand for AI chips will grow in line with demand for AI products. PwC predicts that AI will create productivity and consumption windfalls that add $15.7 trillion (or 14%) to global GDP in 2030. Insight Partners projects that this expansion will push sales of AI chips from $5.7 billion in 2018 to $83.3 billion in 2027, at a compound annual growth rate (CAGR) of 35%. This rate is nearly ten times that of the forecast growth in demand for non-AI chips.

Projected Global Sales of AI Chips

Source: Insight Partners.

The market for AI chips used to compute ML algorithms is basically divided into two segments: training and inference. Training is when enormous volumes of data are fed into AI algorithms to build and refine the powerful predictive models necessary to perform complex tasks in dynamic environments. Inference is when these trained models are applied to make real-time decisions based on real-world stimuli. Training was the first market segment to take off, but inference is now the more important segment as AI-enabled devices proliferate.

Projected Growth of AI Chip Revenues for Inference vs. Training Computing

Note: Figures show upper bound of estimate range.
Source: McKinsey.

Training typically occurs in the “cloud” at large data centers, while inference happens both in the cloud and increasingly at the “edge,” which means within end-use devices like smart home assistants, drones, or AVs. In 2025, cloud computing will probably still be the larger market for AI chips, but edge computing will see faster growth as inference overtakes training (see “AI in the Cloud” section).

Projected Growth of AI Chip Revenues for Cloud vs. Edge Computing

Note: Figures show upper bound of estimate range.
Source: McKinsey.

The major use of AI chips will be in the computation of ML algorithms (including training in the cloud and inference at the edge). This process involves the input and output of enormous amounts of data, which will then also drive demand for AI-optimized memory chips and storage chips. According to McKinsey, these three segments—computing, memory, and storage—will each experience significant growth by mid-next decade.

Projected Growth in AI Chip Revenues by Sectors

Note: Figures show upper bound of estimate range. Storage is for non-volatile memory only.
Source: McKinsey.

AI chips will become ubiquitous, embedded in smartphones, laptops, cars, surveillance systems, manufacturing robots, and military hardware like drones, radar, and satellites. The largest end-use markets for AI chips in the next few years, according to PwC, will be healthcare (diagnosis and disease prevention), automotive (driver-assistance systems), and financial services (identity authentication and portfolio management).

Projected Major Industry Demand Drivers of AI Chips, 2022

Note: Figures show upper bound of estimate range.
Source: PwC.

China Wants to Play

The increasing need for customized AI chips means that, at least in the next few years, the AI chip sector will not be widely commoditized, and both cost and revenue should rise for chip producers. This dynamic encourages innovation in chip design and provides a window of opportunity for new players. Industry insiders describe a “Cambrian explosion” of semiconductor startups. Many Chinese companies, and especially Huawei, have begun to capitalize on this opening by investing heavily in AI chip design, and they could well become leading providers of specialized AI chips (see “Apple vs. Huawei” section).

Number of Firms Designing AI Chips, 2019

Source: Center for Data Innovation.

China’s push to develop AI chips can be understood as a response to the country’s longstanding dependence on foreign chipmakers—a vulnerability laid bare in April 2018 when Washington threatened to cripple Chinese telecoms firm ZTE by cutting its access to US chips. Indeed, China imported $312 billion worth of semiconductors in 2018, more than it spent on importing foreign oil.

Beijing has tried for decades to build a competitive domestic semiconductor industry. It has pursued this goal with ambitious industrial policies such as “Made in China 2025,” the 13th Five-Year Plan, and generous state funding. But so far the results have been mixed.

Market Share in the Global Semiconductor Industry, 2018

Note: Data based on location of corporate headquarters.
Source: Semiconductor Industry Association.

While Chinese firms are gaining ground in the market for low-end memory chips and OSAT (outsourced semiconductor assembly and packaging), only 16% of the semiconductors used in China are made domestically. China is even farther behind in the design and fabrication of advanced chips, which occurs mostly in Taiwan and South Korea.

Not only do Chinese producers lack vital know-how in the manufacture of higher-end chips, rising barriers between the American and Chinese semiconductor industries mean that geopolitics could have an enduring impact on China’s future development of AI chips. Understanding the globalized and diversified nature of semiconductor supply chains is essential for evaluating the costs and benefits of more closed production networks.