| Gallium Arsenide (GaAs)
is a compound semiconductor made up of Gallium and Arsenic. Gallium,
a rare chemical element, is made from the smelting of aluminum and
arsenic. Gallium Arsenide’s value as a semiconductor comes from its
ability to conduct electricity faster than silicon (currently the
most used semiconductor material). Also, GaAs has the ability to
emit light and generates less noise than most other types of
semiconductor components. These qualities make GaAs an advantageous
material for use in high-speed communications devices such as cell
phones and in fiber optic networks. GaAs also excels in its ability
to amplify weak-signals. However, even with all these advantages,
silicon is used in the majority of semiconductors manufactured
today. This is because silicon is very inexpensive due to its great
supply (second in abundance on earth next to oxygen).
The reason GaAs has had limited
market share is due to slow production times and high cost of
production. Before the 1990’s, the majority of GaAs applications
were used in the military, where high performance was the main
concern and cost was less of an issue. GaAs semiconductors are key
components in military electronics such as radars, smart weapons,
electronic warfare and communications. In the 1990’s, the high
growth of cell phones and fiber optic networks along with improved
GaAs manufacturing speeds helped to make GaAs semiconductors more
commercially acceptable.
According to the market research
firm, The Information Network, the market for gallium arsenide
semiconductors is projected to grow at a compound annual growth rate
of over 30% into 2004. This is higher than the 16% compound annual
growth rate of the overall semiconductor industry as projected by
the Semiconductor Industry Association. This is largely due to the
high performance needs of communications applications such as
wireless handsets and fiber optic systems. Although silicon is used
in the majority of semiconductors manufactured today and is less
expensive and quicker to manufacture than gallium arsenide wafers,
gallium arsenide wafers can be produced with line widths that are
much smaller than silicon. The smaller features of gallium arsenide
wafers makes the chips faster than silicon as the electrons do not
have to travel as far. GaAs transistors can operate at frequencies
up to five times faster than silicon.
The majority of demand for GaAs
devices has come from wireless handsets1.
According to the market and intelligence firm IDC, wireless handset
sales will grow at a compound annual growth rate of 24% into 2004.
This growth is being fueled by an increasing demand for wireless
data. A new technology standard that allows handset manufacturers to
offer Internet services on mobile phones is known as WAP or Wireless
Application Protocol. WAP technology enables wireless handsets to
access the same Internet information that can be accessed from a
desktop.
The broadband fiber optic networking
market is second in demand for GaAs semiconductors. Broadband fiber
optic networks can be segregated into telecommunications and data
communications applications. Fiber optic systems for
telecommunications applications connect central office switches with
one another whereas data communications systems allow for the rapid
transfer of data between buildings and over short distances. A high
growth area within the fiber optic data communications area is the
use of Gigabit Ethernet standards. Both high-speed networks
(telecommunications and data communications) have created an
increase in demand for the electronic components that are used in
these applications. The higher speeds associated with GaAs devices
make it the circuit of choice in these applications.
Strong growth is projected in both
areas of the broadband fiber optic networking market. According to
IDC, worldwide fiber optic telecommunications networks are projected
to grow at a compound annual growth rate of 35% into 2003. Dataquest
states that the Gigabit Ethernet market will grow at a compound
annual growth rate of 43% into 2004. The growing market in these
areas suggests that GaAs semiconductors will make up a larger
portion of the overall semiconductor market in the next few years.
This should bode well for the companies that manufacture GaAs
semiconductors.
Companies such as Alpha Industries (Nasdaq:
AHAA), Anadigics (Nasdaq: ANAD), RF Micro Devices (Nasdaq: RFMD) and
TriQuint Semiconductor (Nasdaq: TQNT) derive a significant portion
of their revenue from the sale of GaAs semiconductors. The chart
below shows the quarterly growth in revenue of each company for the
past three years.
The chart indicates that revenue
increased sequentially until late 2000, when it began to decline.
The decline can be attributed to the decrease in technology spending
during that time. However, if you factor out the recent decline in
technology spending and take the 5-year compound annual growth rate
for these companies from fiscal 1996 to fiscal 2000, the trend has
shown a steady increase in revenue. The 5-year compound annual
growth rate in revenue during this time period was 23% for Alpha
Industries, 27% for Anadigics, 104% for RF Micro Devices and 46% for
TriQuint Semiconductor.
I believe that the decline in
technology spending will soon end and that the semiconductor
industry will show signs of improvement beginning in 2002. According
to the Semiconductor Industry Association’s (SIA) semiconductor
forecast for 2002-2004, the global semiconductor industry should
recover from the inventory build up that occurred in 2000 and the
weak demand in 2001. The SIA believes the industry will begin to
recover in the fourth quarter of 2001 and show growth of 6% in 2002
and 21% in 2003 and 2004.
In summary, the overall semiconductor
industry is projected to improve with the market for GaAs
semiconductors projected to grow at a faster rate than the market
for silicon. Sales of wireless handsets and broadband fiber optics
are expected to be the driving forces behind this growth. Key points
to consider are:
- The smaller circuit features that
can be obtained with GaAs semiconductors enable circuit speeds to
be as much as five times faster than silicon.
- Excluding the current decline in
technology spending, companies that manufacture GaAs
semiconductors have experienced strong growth over the past five
years.
- Growth for the overall
semiconductor industry should start to improve in the fourth
quarter of 2001.
1 Source – Friedman Billings
Ramsey report on GaAs Integrated Circuits, March 2001
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