As correctly predicted by Future Horizons, UK, we’ve reached the top of the semiconductor supercycle roller-coaster, and the downward plunge has started. Sectors in the front are already feeling the impact. And, those in the rear?
Presenting the IFS-2022 mid-term semiconductor industry update today, Malcolm Penn, CEO, Future Horizons, said the 2021 semiconductor forecast summary was that there’s no tight capacity relief before 2022 at the earliest. The actual growth of global semiconductor industry in 2021 was 26.6 percent. We forecast you can enjoy the super-cycle. However, it’ll crash in 2023! Economy determines what users can afford to buy. Unit demand reflects what users actually buy. Capacity determines how much demand can be met. ASPs set the price units can be sold for.
May 2022 forecast was revised down to +6 percent vs. +10 percent in Jan 2022, with consumer spending squeeze. Downturn was expected to impact In Q3 (capacity increases loosening up supply constraints). It all actually broke in June 2022 with a bang, pushing our forecast into bear territory. There was strong industry denial sentiment. Many believed or hoped it won’t affect them. Downturn has been uneven and patchy. It is not yet in full flow, but no sector is 100 percent immune. Supply was easing, leading to shorter lead time and too much inventory. So, there were adjustments, followed by falling demand and collapsing ASPs.
Inflation outlook is much worse than originally believed at high double-digit range. Fed has now abandoned ‘soft landing’ goal. Interest rate rises are much faster in response, despite recession risk. Russia declared weaponization of oil and natural supplies, especially In Europe. China’s still aggressive Covid-19 zero tolerance strategy is disrupting the supply chain. Inflation, high energy costs, and interest rate rises are squeezing disposable incomes. There is record high global public, private and household indebtedness, leading to higher servicing cost. Russia aggression and war sanctions are disrupting the global economy.
Heightened geopolitical tensions with China for Taiwan and technology sanctions are also there. Global inflation shocks coincident with economic slowdown. Every single warning light is now flashing red. Overall, the economy is seeing strong deterioration since the last forecast in May 2022.
However, unit demand is still running way above long-term average. Actual demand trend is 7.8 billion per month. The underlying trend is 6.5 billion per month. Shipments are now seriously over-inflated by ~20 percent. Adjustment is inevitable, and real demand is not getting measured anymore.
Capex spends are also overheated. Capex spend as percentage of sales is at 20-year record high with overshoot inevitable. There was increase in capacity in 2022-23 following massive 2021-22 capex splurge. 2H-2021 of 74 percent increase will hit home in 2H-2022 just as the market turns down.
ASPs plummeted in June 2022, much sooner than usual. IC ASPs plunged 18.1 percent, from Q2 $1.350 peak to $1.105 driven by memory collapse. Other sectors are holding up for now. However, 1H-2023 marks a danger zone, and the worst is yet to come.
The economy has been a toxic mix of slowing demand and recession. There are supply chain disruptions, faster monetary normalization, global indebtedness, Russia sanctions impact, and China-Taiwan tensions.
Unit demand is running way above long-term average at 8 billion /month v. 6.5 billion trend. Shipments are now seriously (+30 percent) over-inflated, with over-stretched lead times, and high levels of inventory.
In capacity, there was massive capex splurge started in 2H-2020. 2021 saw $103 billion, up 45 percent vs. 2020, targeting over-inflated IC unit demand. Increased capacity was starting on-line in 2H-2022. In ASPs, the steep upward trajectory collapsed in June 2022. 77 percent of the supercycle ASP gain has been wiped out! In two months, tier 2/3 foundry ASP cuts in the pipeline. Can TSMC hold the line?
All four driving influences now show storm clouds on the horizons. Increase in capacity is coincident with softening demand. For the most part, the industry is still in hopeful denial. Red flag alert – it doesn’t get much worse than this!
The worldwide semiconductor growth momentum indicator is still declining. Downward momentum is still accelerating, and is in full swing. So too are the annualized growth rate trends. We are on-track for double-digit negative 2023 growth!
Semiconductor market cyclicality still rules! 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. Unit shipments equals demand plus increased inventory adjustment.
Then, supply overshoots, with overheated demand, lead times shrink, customers purge stocks, and order books collapse (there is 0.5x real demand at the start of the slump). Unit shipments now equal demand minus inventory purge. It typically takes several months for full impact to bite home.
2022 semiconductor market 10 percent growth is still possible, but the market’s overheating and the road ahead is stony. There are supply/demand rebalance, slowdown in end demand, and economic slowdown. When the bubble bursts, unit shipments plummet first, and then ASPs collapse! Don’t be surprised if the market goes negative!!
+4 percent forecast for 2022, downturn in 2023!
The Future Horizons forecast for the global semiconductor industry has now been revised to +4 percent due to worsening economic outlook, vs. +6 percent in May 2022, down from +10 percent in January 2022 due to consumer spending squeeze. +6 percent is still just about possible, but so is +2 percent, given the magnitude of the June slowdown.
The forecast for global semiconductor industry for 2023 is that the market will go negative by -22 percent, to about $450.9 billion. The 17th industry down cycle has definitely now started. We will have a collapsing chip market, coupled with a global economic downturn. However, we should be back to single-digit positive growth in 2024!
No shortage of growth drivers
There is fundamental flaw in all re-shoring initiatives. Onshoring should start from the top. There is also no OEM champion. Neither does the financial community like it!
Do note that there is no shortage of key industry growth drivers. These include smartphones and consumer, including PCs, communications backbone, servers, automotive, including EV, energy, including alternative energy, IoT, home automation, industrial, including robotics, AI, transportation, games consoles, bio and e-medical, quantum computing and sensors, and even stuff that we’ve not yet thought of!
There is plenty of disruptive semiconductor rich technology. Foxconn first electric SUV sees significant pre-orders. There is the all-new Nexo running on hydrogen — the real green alternative. That’s just in automotive! Cloud-based framework is powered by big tech. There is lots of compute power, lots of AI for analysis, lots of IoT and connectivity, etc. Modern day trustbusters have big tech in their sights.
There are key apps to watch! In bio and e-medical, Apple is positioning itself to be the dominant player. And, so is Imec! It is interesting that Apple is one of the few tech companies without a major presence In Leuven. Technology roadmap also marches forth! Customers’ scaling roadmaps are continuing. Moore’s Law is not dead, as many believe. Logic will see 2nm breached by 2025. DRAM will move on to 1B node. 3D NAND will move to over 300 number of layers. All of this will happen by 2025.
TSMC leads the way, for now! N3 node is not ready for iPhone 14. Hence, it is using ‘tuned up’ N5+ node labelled N4. TSMC’s N3 node is now using FinFET vs. GAA (gate all around) unlike Samsung and Intel. However, volume production starts this month vs. next year. It is likely that TSMC’s N3 is a stop-gap FinFET parallel to it’s 20nm planar node, until the real N3 node (but labelled N2) appears using GAA (labelled nanosheet) by mid-2024.
Downturns are a structural part of the industry psyche, which is quite natural and normal. They are also a time when longer-term market share gains are best made. It is also a time when innovation comes to the fore. Firms emphasize new products to invent their way out of the crisis.
Foundries and IDMs ration R&D access to fab time in an upturn, so that innovation slows. The opposite happens in a downturn, when fab capacity becomes abundant. There is now no shortage of wafer slots to run R&D wafers. R&D and new IC design activity always accelerates during a downturn. As with the past cycles, the downturn beneficiaries will be the IC design houses, EDA industry and leading-edge suppliers. It’s different this time? Don’t bet on it!