Global semiconductor industry grows 26 percent in 2021, likely to grow 10 percent in 2022: Future Horizons

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Malcolm Penn, Chairman and CEO, Future Horizons, UK, presented the global semiconductor industry update for 2021 and forecast for 2022 at the IFS 2022 today.

First, the numbers! The global semiconductor industry has grown +26 percent to $553.425 billion in 2021! For the 2022 forecast, the global semiconductor industry is expected to grow 10 percent to about $608.920 billion. But, the market’s overheating and road ahead is stony. Growth can be also 14 percent to $630.732 billion.

‘Perfect storm’ upturn
This is just another ‘perfect storm’ upturn that has been brewing since 2018. Actually, #16, as 15 previous upturns since the first cyclical downturn In 1961. It is not that special either (+26 percent), and 10 previous booms were stronger (e.g. +32 percent in 2010). The problem was that the industry had not had a shortage since the 2000 Dot.Com boom. Back then, everyone was lulled into a false sense of complacency. It’s different this time!

There was a decade of low, single-digit growth. No one believed Pre-Lehman semiconductor demand would return. The new mantra / received industry wisdom was that the glory days are over. Shortages would have hit home in 2018, had the market not collapsed. There was no slack in the system. Future Horizons coined the era as ‘fab tight’. We cautioned back then that this was an industry gamechanger.

Everything was fine-tuned and finely balanced. Consolidation and outsourcing meant reduced capacity options. This meant better fab utilization rates. Better utilization rates meant stable lead-times and low levels of inventory. The industry is now ‘fab tight’ due to reduced competition and high utilization rates. Asset-lite / zero inventory mantra also drove high corporate balance sheet efficiency.

The signs were all there, although everyone was in denial. Low levels of inventory / just in time (JIT) simply don’t work in semiconductors. Supply shortages quickly turned to panic. Everyone ‘forgot’ a small uptick quickly that upended the status quo. 12-18 months capex time delay vs. corresponding capacity increase, and 2-4 months minimum wafer fab cycle time plus queuing.

Perfect storm broke in July 2020, but nobody was paying attention. There was 6.5 percent growth for semiconductor industry in 2020, and that set the stage for 2021 super-cycle. Hence, our 18 percent (24 percent upside) forecast.

The storm has been brewing since 2018. It just ‘never’ broke (lulling everyone into complacency). Industry fundamentals had not changed. There was widespread disregard for dangerous supply-demand fragility. Supply maxed out in Q4-2020 due to lack of investment in Q4-2019. Covid-19 was the trigger, and not the cause of the uptick that broke the status quo. The cause was industry’s fixation on high asset efficiency vs. contingency reserves.

It is impossible to achieve sustainable demand-supply balance. Nothing has changed in the past 60 years. The semiconductor industry is still fundamentally cyclical. We need to keep track of the current status vs. the underlying trends. Key driving influences include economy, unit demand, capacity and ASPs. Global economic growth was 4.9 percent for 2022, vs. 5.9 percent in 2021. 2023 should have average GDP growth of 3.3 percent.

Economic headwinds
There are economic headwinds. Increased inflation was reflecting pandemic-related supply-demand mismatches. There were higher commodity prices compared to year ago lows. Uncertain outcome was due to unknown duration of pandemic-related supply disruptions. Rising inflation could prompt faster monetary normalization in advanced economies. More aggressive Covid-19 variants could emerge before widespread vaccination is reached. Overall balance of growth risks are tilted to the downside.

For unit demand, shipments are over-inflated (demand + inventory adjustments). Overshoot is inevitable. Demand, a seen by IC firms, get seriously distorted. Massive capex surge is following sustained period of underinvestment.

If we look at the capex pinch points, 2H-2020 spend was up 26 percent (insufficient to trigger overcapacity in 2H-2021). 1H-2021 spend was up 56 percent. It could trigger 2H-2022 oversupply, unless offset by Q2-Q3 seasonal uptick. 2H-2021 spend was up 75 percent minimum (coincident with Q4 seasonal slowdown, and this will be the knock-out blow. Once supply catches up with ‘demand’, the chip market will implode.

ASP recovery has been in full flow since July 2021. Enjoy, while it lasts, as long-term IC ASP growth is zero. Collapse, when it does come, will be sudden and sharp.

Industry forecast
Last year, Future Horizons forecast the global semiconductor industry was slated to grow from 18 percent to $520.598 billion in 2021, to 24 percent to $547.472 billion in 2021. There will be no tight capacity relief before 2022 at the earliest. We actually witnessed growth of +26 percent to $553.425 billion in 2021! This is just a bit above the upside forecast. There is not much upside or downside to the number of US $553 billion.

For the 2022 forecast, the global semiconductor industry is expected to grow 10 percent, to about $608.920 billion, but the market’s overheating and road ahead is stony. It can also grow 14 percent to $630.732 billion.

Pay attention to trends
Supply/demand rebalance will happen, once the 2021 capex increases bite home. There can be slowdown in end demand, as well as economic slowdown. When the bubble bursts, unit shipments will plummet first, and then ASPs collapse. Don’t be surprised if the market goes negative!

It is time for the semiconductor industry to rethink the value chain. Prepare for the inevitable recession now, There are no soft landings. Keep your eyes peeled for clues, and act decisively, when needed.

Pay attention to the supply chain. There are five rules. One, JIT / lean inventory models do not work in semiconductors. Two, nor does the long supply-side lead times (1.3 days/mask), with many more masks at each new node. Three, most logic is now outsourced and single-sourced. There can be process and design rule incompatibilities. Four, advanced IC capacity is now in the hands of a few. Don’t rely on Samsung or Intel to bail you out. Five, don’t expect bleeding edge capacity home-shored anytime soon. TSMC is currently building two 3nm fabs In Taiwan, one for Apple and one for Intel.

Enjoy the super-cycle! If it lasts through 2022, it will crash in 2023. On-shoring is potentially the biggest post crash recovery risk. Capex expansion plan ‘bragging rights’ are now out of control.

Regionally, the European semiconductor market is 8 percent, USA is about 16 percent, and Asia is leading. EDA industry is also going to be enjoying a very good future. The ability to design your custom chip is an ideal solution. EDA industry has brought back costs down to reasonable levels. The EDA industry has all these OEM customers. Automotive companies will also now need to develop super-advanced chips.