Outlook for global semiconductor industry in 2023 and beyond: Future Horizons

SEMI, USA recently organized the International Trade Partners Conference (ITPC 2022) at the Fairmont Orchid, Kohala Coast, Hawaii.

Semiconductors were once deemed the enabling technology for the electronic era but are now considered essential to the modern economy and functioning of every aspect of society. Global reliance on this critical sector was clearly emphasized during the pandemic years and will only intensify as we move forward.

Malcolm Penn, Founder and CEO, Future Horizons, presented the outlook for the semiconductor industry in 2023 and beyond. There’s been plenty to keep industry executives awake at nights. These include semiconductor market downturn, inflation/interest rate rises, global recession, Russia’s war in Ukraine, China-Taiwan tension, supply chain disruptions, Chips Act/onshoring. In May 2022, Future Horizons even warned of negative 22 percent growth for semiconductors in 2023, although, the jury is still out on that.

There have been 15 previous upturns since the first cyclical downturn in 1961. 10 previous booms were stronger. Shortages would have hit in 2018 had the market not collapsed. Problem was the industry had not had a shortage since the 2000 ‘Dot.Com’ boom. The 2021 boom and 2022 shortages were predictable, and there was nothing special. The semiconductor industry is still fundamentally structurally cyclical. Perhaps, it needs a new model. OEMs need to share the capex business risk.

Four driving influences
There have been four key driving influences. First, the economy! There has been toxic mix of slowing demand and recession. We have seen supply chain disruptions, faster monetary normalization, global indebtedness, Russia and China Sanctions, China-Taiwan tensions, etc.

Next comes unit demand! It has been running way above long-term average. We have seen 7.8b/week vs. 6.5b trend. Shipments are now seriously +20 percent over-inflated. There are collapsing over-stretched lead times, and high levels of inventory. Third, there is capacity. There was a massive 2021-22 capex spending spree. In 2021, it was $103 billion, up 45 percent vs. 2020. It was targeting over-inflated IC unit demand. Increased Capacity was starting online in 2H-2022.

Finally, ASPs. The steep upward trajectory collapsed in June. 77 percent of the supercycle ASP gain was wiped out in two months. Tier 2/3 foundry ASP cuts in the pipeline, Can TSMC hold the line? The increase in capacity is co-incident with softening market demand. Global economy is now heading for high inflation / interest rate rocks.

Unit shipments have been way above long-term average. Shipments are now seriously over-inflated by ~20 percent. A correction is inevitable! Real demand is not measured anymore (demand minus inventory liquidation once lead times shrink and fab WIP gets exhausted). As per the November WSTS Blue Book, it is right on cue as the downward correction has now started.

The capacity or capex spend is now seriously overheated. Sustained period of underinvestment had caused 2021-22 supply shortages. Subsequent catch up spend as percentage for semiconductor sales are at an unsustainable record high (targeting actual vs. real demand).

ASP recovery was in full flow since Jan. 2021, which was shortages driven. ASP collapsed in June 2022, and it’s always sudden, steep, and unexpected. Once the unit demand slows, the backlogs shrink and ASPs always plummet. Then, ‘any order’s a good order’! All of the year-on-year growth rates are now negative.

Forecast still at +4 percent for 2022
The global semiconductor industry is still forecast to grow +4 percent for 2022, as of Sept. 2022. It was +6 percent in May 2022, and +10 percent in Jan. 2022. This has happened due to consumer spending squeeze, followed by high inflation and interest rate rises. We are still bullish about 6 percent growth, but that’s highly improbable. The bear downside is +2 percent, which is much more probable, but negative growth is unlikely. The global semiconductor industry is still forecast to grow to $578.302 billion at 4 percent in 2022.

As per November WSTS Blue Book, the Q3 growth hit -6.3 percent, which is just below our worse case bear scenario. That means, any forecast over +5 percent just isn’t going to happen! That would require positive industry growth in Q4-22.

The 17th semiconductor industry down cycle is now in full flow. We are seeing collapsing demand, coupled with increased capacity, and now, a global economic downturn. The 2023 growth forecast for the semiconductor industry is still -22 percent, and there is no change from the Jan. 2022 forecast. Worsening economic outlook will likely prolong the downturn and push the recovery out. It is too early to call the outlook for 2024. Statistically, we should be back to low, single-digit positive growth. Magnitude and timing depends on the depth and reach of the global economic slowdown/recession.

No shortages of growth drivers
Looking forward, there are no shortages of growth drivers for the semiconductor industry. We have things such as smartphones and consumer, including PCs, communications backbone, servers, automotive, including EV, energy, including alternative energy, IoT, home automation, industrial, including robotics, transportation, AI, games and consoles, bio and e-medical, quantum computing and sensors, and even stuff that we’ve not yet thought of!

Downturns are when innovation and longer-term market share gains come to the fore. The successful firms double down on R&D and ‘invent ways out of the crisis’. R&D always accelerates during a downturn. There is no denying at the human and corporate levels. They are painful to endure. Cutbacks, pushbacks, and layoffs are often unavoidable. Better supply chain partnerships would clearly help their impact.

It is time to rethink the industry supply chain model – top down vs. bottom up driven. OEMs must take more responsibility for their security of chip supply. Keep track of the industry fundaments – don’t overthink or overhype. It’s rarely ‘different this time’, as cycles happen. Deal with them, and don’t deny it. Downturns are a structural part of the industry psyche, and are systemic. Be prepared, and don’t fight it! The 17th industry upturn’s round the corner.