Global semiconductor industry forecast now +6 percent for 2022; slowdown depends on timing: Future Horizons

Malcolm Penn, Chairman and CEO, Future Horizons, UK, presented the mid-term semiconductor industry update today. The global semiconductor industry is forecast to grow +6 percent for 2022. The slowdown depends on the maturity of the timing.

Perfect storm broke in July 2020, but nobody was paying attention. 6.5 percent growth in 2020 set the stage for 2021’s super-cycle. Hence, the 18 percent (24 percent upside) forecast. There was 26.6 percent growth in 2021. It’s not that special, as there have been 10 previous stronger booms (e.g. +32 percent in 2010 / +37 percent in 2000, etc.).

Supply maxed out in Q4-20 due to lack of investment in Q4-19. We can’t blame that on Covid-19. This is the 16th industry boom since the first cyclical downturn In 1961 (demand and cyclicality). There is widespread disregard for supply-demand balance fragility (despite clear warnings). Covid-19 was the trigger, not the cause of the shortage. The real cause was industry’s lack of focus on the security of supply.

Economy determines what users can afford to buy. Unit demand reflects what users actually buy. Capacity determines how much demand can be met. ASP sets the price the units can be sold for. We need to track current status vs. underlying trends. If above or below, a correction’s inevitable.

Inflation surge is prompting interest rate rises and faster monetary normalization. There is global oil, natural gas and electricity energy crisis, especially in Europe. China’s omicron outbreak and uncertain outcome of more aggressive Covid-19 variants are also there. Back to work commuting costs are squeezing impact on disposable incomes. There are pandemic-related supply chain disruptions, labour, and food, and commodity shortages. The global public, private and household indebtedness is at all-time record high. Russian aggression and war sanctions could destabilize the global economy. All of this, plus the ongoing geopolitical tensions with China over Taiwan.

Unit demand is running way above the long-tern average. Shipments are now seriously over-inflated. Overshoot is inevitable (real demand not measured anymore). There will be shorter leadtimes and inventory liquidation. That means, unit shipments will plummet.

There was increase in capacity in 2022-23 following massive 2020-21 capex splurge. ASPs recovery are in full flow since Dec. 2021. ASPs are also hostage to Moore’s Law. The long-term average growth is zero.

Industry forecast
Now, the semiconductor industry can be dangerous for your wealth! The worldwide semiconductor growth momentum indicator turned in Q1-2022. Golden cross happens when 3/12 rises above 12/12 (Nov. 2019). Therefore, sunny weather ahead! Death cross happens when 3/12 falls below 12/12 (Mar. 2022). There is stormy weather ahead! We are in the third year of growth with capex booming and uncertain (worsening) economy. We are in for a potential double whammy! There is over investment coupled with slowdown in demand.

The semiconductor market cycle still rules, despite what you hear! Demand rises, lead-times extend, buyers order more stock to cover the delay/just in case. Lead-times extend more as suppliers struggle to meet increased level of demand. The existing capacity maxes out, and additional capacity is needed to meet demand. Capacity is now targeting an overheated level of demand (up to 2x real demand at it’s peak.

There are supply overshoots (overheated) demand, lead times shrink, customer stocks purged, order books collapse (0.5x real demand at the start of the slump). Once supply catches ‘demand’, the chip market will implode, and there are no soft landings.

The global semiconductor industry is now forecast at +6 percent growth for 2022, down from +10 percent in Jan. 2022, due to consumer spending squeeze. 10 percent is still possible, but so is +4 percent. The slowdown is inevitable, and the magnitude depends on the timing. When the bubble bursts, it bursts! Unit shipments plummet first, and then, ASPs collapse.

The outlook for 2023 is that the semiconductor market will go negative, to -22 percent. The 17th down cycle fuse is already burning. We will have a collapsing chip market, coupled with a global economic downturn. There are no soft landings. Violent swings are normal in this industry.

The cycles have moderated. Cycles are driven more by supply-demand imbalance, not the market. Build to demand is not the answer. There is no slack in the system. Fundamental market characteristics have not changed at all!

Takeaways
Once thought to have gone the way of peroxide hair and trench coats, inflation is now back on the board-level agenda. Driving factors are a barrage of compounding shocks, including war, commodity crisis, supply-chain disruption and labor shortages. Higher energy and import prices will inevitably squeeze discretionary spending and make economies poorer.

Interest rate rises are traditional Central Bank tool to tame the increased inflation. Off the 13 Fed-tightening periods since 1950, 10 led to recession. The other three didn’t, only because the Fed quickly reversed policy. So too, is the risk of recession! We haven’t had a global recession since Lehman, so far.

Fundamentals are embedded in the fabric. Always react to short-term dynamics, but never lose sight of the underlying trends. There are no silver bullets, just well-executed plans. Those who react the fastest, gain longer-term advantage. In a boom, be prepared for the market to turn tomorrow. In a slowdown, wait for it to turn today.

History gives us the tools to analyze and explain problems in the past. It shows patterns that might be invisible in the present. It provides crucial perspectives for understanding current and future problems. Ignore history at your peril! We need to keep track of the fundamentals, and be prepared to act fast. We need to keep the froth, noise and hype in perspective. Clear heads win through every time!