Overview Of The Semiconductor Capital Equipment Industry

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 is how KLA-Tencor 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 is 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”s tructure, 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.

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Disclosure: KLA-Tencor is a holding in client portfolios. I have an economic interest in the performance of the stock. The above True Vine Letter is an excerpt from a recent more

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Barry Hochhauser 10 months ago Member's comment

This is great. I've often asked "what are these guys talking about?!"

Joshua Hall 10 months ago Author's comment


I knew I wasn't the only one!

Susan Miller 10 months ago Member's comment

You aren't!

Harry Goldstein 10 months ago Member's comment

Impressive stuff.

Joshua Hall 10 months ago Author's comment


Thanks for the kind word.