The global semiconductor supply chain, once lauded for its efficiency and cost advantages, has become a strategic vulnerability. The COVID-19 pandemic exposed critical dependencies and bottlenecks, resulting in widespread shortages that rippled through industries, stalling production lines in automotive, electronics, and healthcare. These shortages did not just disrupt business—they created cascading domestic challenges, including inflationary pressures, slowed economic recovery, and heightened national security concerns.

During this time, companies experimented with different pricing strategies to manage profitability. Some companies used their pricing power to dramatically increase prices between 2021 and 2023, capitalizing on the constrained market. While some large customers were able to absorb these increases or pass them along to end-consumers, many smaller customers were left without inventory, eroding trust and straining relationships. Other companies implemented short-term price adjustments to address increasing cost pressure, but these measures have failed to resolve longer-term structural challenges facing the industry.

Semiconductors are now widely recognized as foundational to modern economies, powering critical infrastructure, defense systems, and emerging technologies like artificial intelligence and advanced telecommunications. Rising geopolitical tensions, particularly between China and the US, coupled with a realization that a significant portion of production and technology leadership is concentrated in a few regions—particularly Taiwan—has raised alarms.

In response, countries are prioritizing localization of semiconductor manufacturing as a matter of national security. The US CHIPS Act, the European Union’s semiconductor fund, and similar initiatives globally are channeling billions of dollars into developing domestic manufacturing capacity. However, localization efforts often come with higher costs, from advanced equipment, to labor, to regulatory compliance, and pricing strategies must reflect these new dynamics.

The evolving horizon of Moore’s Law

Transistor miniaturization and the shift to advanced packaging in semiconductors

Moore’s law, the notion that the number of transistors in a circuit will double every two years while cost remains steady, has undeniably begun to slow. Though innovation on transistor miniaturization continues, the industry is exploring optimizations in other parts of the value chain with advanced packaging emerging as a critical frontier.

Advanced packaging technologies, such as 2.5D and 3D packaging, enable heterogeneous integration of multiple specialized dies into a single package. By placing chips closer together and/or stacking them vertically, manufacturers deliver improvements in performance, energy efficiency, and cost, continuing the spirit of Moore’s Law.

While industry staples like TSMC and Intel are spearheading advancements the shift towards advanced packaging is also creating opportunities for new entrants to disrupt established workflows.

Advanced packages require closer collaboration between foundries, substrate providers, and equipment manufacturers. Package design, substrate optimization, and supply coordination will become critical capabilities which may lead to redistribution of value creation across the supply chain. Companies across the value chain must reassess their competitive positioning and determine where they can create and capture value. For example, Applied Materials, SKC, and the US Chips ACTs investment in Absolics’ Georgia based glass manufacturing facility is just one example that highlights how new market entrants may disrupt existing practices.

For semiconductor leaders, this shift has meaningful implications for pricing. Advanced packaging not only delivers higher performance but also introduces greater complexity and cost. Traditional cost-plus models struggle to account for the added value provided by packaging innovations or the bespoke nature of many advanced solutions.

The financial toll of innovation

Rising costs in semiconductors: Why strategic pricing matters

The semiconductor industry’s identity is rooted in a relentless drive for innovation. However, as the pace of Moore’s law has slowed, the cost of achieving successive improvements has reached unprecedented levels. Further transistor size reduction, e.g., 5nm to 2nm node, demands capital investments on a staggering scale. Industry estimates suggest the cost of building a state-of-the-art semiconductor fabrication plant, or “fab,” now exceeds $30 billion. Individual extreme ultraviolet (EUV) lithography tools from ASML, the only company today capable of producing such a tool, are priced at upwards of $300 million. The next generation promises even higher prices, underscoring the financial challenge of remaining at the leading edge.

With costs for transistor miniaturization soaring, companies are looking to optimize in other areas, exploring new materials and architectures. Improvements in any of these areas introduce new layers of cost and risk, creating a financial burden that must be carefully managed.

To remain profitable the imperative is clear; companies must recover escalating R&D and production costs while remaining competitive in an increasingly segmented market. Relying on traditional cost-plus pricing models does not account for the significant upfront investments in R&D, nor does it address the increasing prevalence of customer-specific requirements which require additional engineering time and resources. Layering-on shorter downstream product life cycles further intensifies the pressure to recoup costs before the next technological leap renders a product obsolete.

Unrelenting demand

Balancing price and value in the semiconductor boom

The demand for semiconductors is surging at an extraordinary pace, driven by transformative technologies and the proliferation of connected devices. Market research predicts the global semiconductor market will approach a staggering $1 trillion by 2030, with the AI chip segment alone projected to reach $70 billion by 2026. While the full value of AI’s potential applications is only beginning to be understood, the trajectory is obvious: semiconductors are becoming the foundation of nearly every industry.

The increasing inclusion of semiconductors in electric vehicles (EVs), autonomous driving, edge computing, data centers, and defense systems has further intensified the need for complex and specialized chips. Unlike the abstract potential of AI, the value delivered in these applications is often more tangible. For example, auto-grade chips designed to withstand higher environmental stress command a premium. Similarly, advanced raw materials and tools that reduce deformation, lower power consumption, or increase throughput offer measurable benefits that justify higher pricing.

Leading innovators, such as Nvidia, have demonstrated that customers are willing to pay a premium for cutting-edge products that push the boundaries of performance. The same principle applies to new entrants aiming to disrupt traditional markets. For instance, investors in a one-year-old startup designing AI-native chips are betting that superior value—and the pricing power that comes with it—can justify their $100M+ Series A valuation.

Heightened price-sensitivity

How price transparency builds trust in semiconductor pricing

The final force elevating pricing to a strategic priority is the growing demand for transparency from semiconductor customers. With the supply chain disruptions and unfulfilled promises of the COVID-19 years still fresh in memory, buyers have become more sophisticated and assertive in their pricing discussions. They are no longer content with opaque pricing models and are demanding clarity to better forecast fluctuations and mitigate risks in an increasingly volatile market. For example, in the automotive sector—one of the hardest-hit industries during the shortages—clients now frequently push for detailed cost breakdowns and supply guarantees. Similarly, in price-sensitive industries like telecommunications and consumer electronics, customers are under pressure to justify spending to their own internal stakeholders, driving demand for greater alignment between cost and perceived value.

Adding to these pressures is the enduring influence of Moore’s Law, which has ingrained an expectation among customers that prices should decline steadily over time. For decades, this dynamic has fueled the industry’s focus on cost optimization. However, as innovation becomes more expensive and the physical limits of miniaturization loom, semiconductor companies must prepare for the moment when this expectation is no longer tenable.

While customer demands for transparency may initially seem like a challenge, they also present an opportunity for semiconductor firms to redefine how they articulate and capture value. Transparency allows companies to make explicit the metrics that drive willingness-to-pay across the value chain.

Performance metrics like processing speed and power efficiency are well-established levers of value but are far from the only ones. Advanced attributes such as leakage reduction, thermal efficiency, gate density, mask count, and yield improvement offer additional ways to differentiate and monetize semiconductor products. Best-in-class firms not only understand these factors but also benchmark themselves and their competitors across them, creating compelling narratives for why their products command a premium.

As semiconductor companies navigate this shift, they must balance customer-centricity with the need to protect their margins and monetize their innovations. The firms that succeed will be those that turn transparency into a competitive advantage, using it to not only meet customer expectations but also to elevate the role of pricing as a driver of strategic growth.

Reframing semiconductor pricing norms for a competitive edge