System-in-Package (SiP) Packaging

# Executive Summary * The System-in-Package (SiP) packaging industry is at a major inflection point, driven by explosive demand from Artificial Intelligence (AI) and High-Performance Computing (HPC), which is fundamentally reshaping technology roadmaps and revenue streams. * Escalating U.S.-China geopolitical tensions are a primary risk, directly impacting revenue for equipment makers and forcing a costly, multi-billion dollar regionalization of the global supply chain. * Technological innovation has shifted from traditional chip scaling to advanced packaging techniques like 2.5D/3D integration and co-packaged optics, which are now critical for performance gains. * Financial performance is bifurcating, with companies exposed to the AI buildout, such as Taiwan Semiconductor Manufacturing Company (TSM) and ASE Technology Holding Co., Ltd. (ASX), reporting robust growth, while others face headwinds from macroeconomic softness and specific market corrections. * The competitive landscape is dominated by a few highly concentrated leaders, with differentiation based on process technology leadership, specialized packaging services, or critical equipment intellectual property. * Capital allocation is focused on massive capacity expansions to support AI demand and geographic diversification, often supported by government incentives like the U.S. CHIPS Act. ## Key Trends & Outlook The primary catalyst reshaping the System-in-Package industry is the explosive growth of Artificial Intelligence and High-Performance Computing. This demand is creating unprecedented revenue opportunities, with market leader Taiwan Semiconductor Manufacturing Company (TSM) projecting its AI-related revenue will double in 2025, fueling a roughly 30% increase in total sales for the year. This trend drives valuations by shifting the source of performance gains and economic value from front-end node shrinks to advanced back-end packaging. Foundries like TSM, outsourced semiconductor assembly and test (OSAT) providers such as ASE Technology Holding Co., Ltd. (ASX), and equipment suppliers including Applied Materials, Inc. (AMAT) and KLA Corporation (KLAC) are all direct beneficiaries, with ASX expecting over $1 billion in incremental revenue from its Leading-Edge Advanced Packaging and Testing (LEAP) services alone in 2025. This AI-driven super cycle is an immediate, multi-year tailwind expected to accelerate over the next three to five years. Counterbalancing the AI tailwind are significant geopolitical headwinds, primarily from the U.S.-China tech war. These are not abstract risks; U.S. export controls are expected to reduce KLA Corporation's revenue by $300-$350 million for calendar 2026, while trade restrictions directly led to production halts for suppliers like Amkor Technology, Inc. (AMKR) when Nvidia halted production of its China-focused H20 AI chip. In response, the industry is undertaking a massive and costly supply chain regionalization, exemplified by Amkor Technology's $7 billion CHIPS Act-supported facility in Arizona, to mitigate risk and ensure supply security for key customers. The key opportunity lies in enabling the next generation of AI infrastructure through technological leadership in heterogeneous integration, 3D stacking, and co-packaged optics, where equipment suppliers like Applied Materials, Inc. are already building multi-billion dollar businesses. Applied Materials' advanced packaging portfolio generated close to $1.7 billion in fiscal 2024, tripling in size over the last four years, and is projected to double again in the coming years as heterogeneous integration becomes more widespread. The primary risk remains the escalation of trade restrictions, which could further fragment the market, increase operating costs, and limit access to the critical China market for Western firms. ## Competitive Landscape The System-in-Package (SiP) packaging market is highly concentrated, with Taiwan Semiconductor Manufacturing Company (TSM) controlling roughly 62% of the global chip market. This dominance at the foundry level illustrates a key competitive strategy. Some players, like TSM, dominate through monopolistic control of leading-edge process technology. TSM maintains a multi-year lead in the most advanced semiconductor manufacturing nodes, such as 3nm, 2nm, and the upcoming A16, leveraging its immense scale to serve the world's premier fabless chip designers. This strategy allows TSM to command premium pricing and capture the most valuable high-performance markets, including AI and HPC, creating a deep ecosystem where customers design chips around its specific processes. In contrast, other major firms, such as ASE Technology Holding Co., Ltd. (ASX), compete by offering comprehensive outsourced assembly and test (OSAT) services at a massive scale. As the largest OSAT provider, ASX provides a complete, end-to-end suite of back-end services, from wafer bumping and testing to advanced 2.5D/3D packaging. Its aggressive $2 billion capital expenditure plan for 2025 and its development of a comprehensive suite of "LEAP" services for the AI super cycle demonstrate this model in action. A third group, including companies like Applied Materials, Inc. (AMAT) and KLA Corporation (KLAC), focuses on supplying critical equipment with deep intellectual property for specific, indispensable manufacturing steps. Applied Materials' ability to generate $1.7 billion from its advanced packaging portfolio, including unique solutions like the Kinex hybrid bonder, demonstrates its strategy of mastering and monetizing critical materials engineering steps. KLA Corporation, for instance, provides process control and yield management solutions, with its advanced packaging business projected to exceed $925 million in calendar 2025. The key competitive battleground is shifting from the wafer to the package, with leadership in 3D stacking, hybrid bonding, and other heterogeneous integration techniques becoming the key differentiator. ## Financial Performance Revenue performance across the SiP packaging ecosystem is sharply bifurcating, driven by divergent end-market demand. This ranges from over 60% year-over-year (YoY) growth for SkyWater Technology, Inc. (SKYT) in Q3 2025 to declines of over 30% YoY for Lantronix, Inc. (LTRX) in Q4 2025. This bifurcation is driven almost entirely by a company's exposure to the high-growth AI/HPC end-market versus weakness in other consumer and industrial segments undergoing inventory corrections. Companies providing the picks and shovels for the AI gold rush are seeing explosive growth, while those serving mature markets are facing cyclical headwinds. Taiwan Semiconductor Manufacturing Company's projection for approximately 30% revenue growth in 2025, fueled by AI, exemplifies the leaders. In contrast, Kulicke and Soffa Industries, Inc.'s (KLIC) 18.3% YoY revenue decline in Q3 2025 reflects the softness in broader markets. {{chart_0}} Profitability diverges based on the strength of a company's competitive moat and resulting pricing power. Gross margins range from nearly 60% for technology leaders to the mid-20s for foundries operating at lower utilization or with less differentiated offerings. KLA Corporation's 61.3% gross margin in Q1 FY26 and Taiwan Semiconductor Manufacturing Company's 58.6% gross margin in Q2 2025 exemplify the pricing power that comes with technological dominance. In contrast, ACM Research, Inc.'s (ACMR) gross margin contracted to 42.1% from 51.5% a year earlier, reflecting a shift toward lower-margin product mix and higher raw-material costs. {{chart_1}} Capital allocation is currently dominated by massive investments in capacity expansion and supply chain regionalization. These investment priorities are a direct response to the top two material factors: the explosive growth of AI and HPC, and geopolitical tensions. Companies are in a race to build out the infrastructure needed for the AI era while simultaneously de-risking their operations from geopolitical threats. Amkor Technology's $7 billion investment in its Arizona campus, supported by CHIPS Act funding, is a clear example of capital being deployed for geographic diversification. ASE Technology Holding Co., Ltd.'s decision to double facilities capital expenditures to approximately $2 billion in 2025 demonstrates the aggressive investment required to capture AI-related growth. The balance sheets of industry leaders are generally very strong, characterized by substantial cash reserves that provide the flexibility to fund aggressive capital expenditures and weather cyclical downturns. Taiwan Semiconductor Manufacturing Company's $90 billion in cash and marketable securities as of Q2 2025 is the ultimate proof point of the financial strength required to lead this industry. This financial strength is a key competitive advantage, enabling major players to out-invest rivals in the capital-intensive race for technological superiority and regional capacity. {{chart_2}}