Global semiconductor industry to drop -22 percent in 2023! No change from May 2022!!
Global semiconductor industry is forecast to drop by -22 percent in 2023, with no change from May 2022. It remains -22 percent, as per Malcolm Penn, Founder and CEO, Future Horizons, UK, at the IFS 2023 event today.
There’s plenty to keep industry executives awake at nights. Market downturn, energy costs and inflation, interest rate rises, global recession, Russia’s war in Ukraine, China/Taiwan tension, entity list, supply chain disruption. We advice you to keep calm and carry on!
There were 2021 boom and 2022 shortages. This was no. 16! There were 15 previous upturns since the first cyclical downturn in 1961. 10 previous booms were stronger (e.g. 31.8 percent in 2010, 28 percent in 2004, and 36.8 percent in 2000). Shortages would have hit in 2018 had the market not collapsed (US-China trade war and tariffs).
The 2022 crash and 2023 downturn are also quite ‘normal.’ We had third consecutive year of positive industry growth. 1H-2021 capex spend accelerated sharply in 2H-2021 (equals capacity in 2H-2022). The industry had not had a shortage / bust since the 2000 ‘Y2K/Dot.Com’ boom. Any executive under 40 would have never lived through a classic boom-bust cycle.
When demand for goods slows down (oversupply/economic collapse), factory output falls, and expansion plans are cut. Discretionary spending slows putting pressure on services. Unsold stocks rise and selling prices come under pressure. This puts a real squeeze on the corporate cash flow and profits. If demand falls far enough, layoffs and closures are also inevitable. This causes job insecurity and demand falls even further. Even more pressure is placed on factory output as consumers spend less.
Demand eventually bottoms out, and a new equilibrium is established. Inventory has to adjust to lower production level. Factory orders fare more badly than demand. Units ordered equals units required, minus inventory burn. During a downward spiral, orders always understate the real demand.
The opposite happens, when demand for goods increases (shortages/economic boom), factory closures and layoffs abate, triggering comfort level to return. Consumers start to spend again, and factory orders start to increase. Inventory adjustment now goes positive. Job security improves substantially. Consumer spending rises even further, and further increasing demand on the factories. If demand increases enough, factories start to expand. Hiring returns, and eventually, new factories are built.
Inventory has to adjust to a higher production level. Factory orders fare better than demand. Units ordered equals units required, plus inventory build. During the upward spiral, factory orders always overstate real demand. Demand (as seen by semiconductor firms) seriously distorted — 2x during a boom, and 0.5x in a slowdown. Overshoot (both ways) is unavoidable!
The outlook for 2023 is not different this time! Only, the nuances are different, not the fundamentals. The $1-billion-dollar question — will it be -4 percent or -22 percent? Remember, the chip market always needs a strong global economy to flourish.
Unit shipments are way above the long-term average. Today, the economy is clouded in fog and uncertainty. The actual shipments were 7.8 billion/week. The real demand was 7 billion/week. Shipments are still ~10 percent over-inflated vs. trend. The gap is now steadily closing. There is supply/demand uncertainty! Correction is in progress, followed by overshoot. Then, it rebalances! We need 2-3 more quarters before balance gets fully restored.
Capex is currently running rampant! We had massive capex surge following sustained period of underinvestment. We had an eye-watering 19.8 percent of semiconductor sales in October, (but, down from September’s 21.7 percent). Q3 front-end capex surged to 17.2 percent of semiconductor sales, up from 14.6 percent in Q2. It is an all-time record 22-year high, and was unsurpassed only by Q1-2000’s 19 percent single quarter number. We need minimum of four quarters to rein in capex, when no longer needed.
ASPs rout is now in full swing. Q3-2022 ASPs were back to Q1-21 trough (past 6 quarters gain is now all gone). Expect more ASP declines going forward. As long as there is industry overcapacity, IC ASPs will drift toward costs.
The current status today is as follows. The economy has toxic mix of factors. There are supply chain disruptions, inflation, interest rate rises, public and private indebtedness, Ukraine war, China tensions, stagflation and Recession). Shipments are still ~10 percent over-inflated vs. trend. The gap is now steadily closing.
Next, unit demand is running way above long-term average. It is $7.8 billion/week vs. $7 billion trend. Shipments are still inflated, with shrinking lead times. We have slower than normal inventory burn rate, and LTA side effect?
Capacity has massive 2021-22 capex spending spree (2022 was ~flat on 2021’s $103 billion, but up 45 percent vs. 2020. We are still yet to fall! Wait for one more quarter and place in the queue, while low utilization rates are now rampant.
Finally, ASPs steep upward trajectory collapsed in June. (18 month’s supercycle ASP gain is now wiped out. Tier 2/3 Foundry ASP pricing is also under pressure. Can TSMC hold the line?
Every single warning light is still flashing red! Increase in capacity coincident with the softening market demand. There is gloomy economy outlook with high inflation / interest rate.
10 percent growth is still possible for the global semiconductor industry! But, the market’s overheating and the road ahead is stony. There is supply/demand rebalance (once the 2021 capex increases bite home). There will be slowdown in end demand. We are also seeing economic slowdown. When the bubble bursts, unit shipments plummet first, and then ASPs collapse. Don’t be surprised if the market goes negative! In May 2022, the 17th down cycle fuse was already burning. We had a collapsing chip market, coupled with a global economic downturn.
The forecast now is +4 percent (due to worsening economic outlook) or $578.302 billion vs. +6 percent in May, 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.
It is now anybody’s guess what December’s number actually will be! There is absolutely no insight or guidance from historical data trends. 7.4 percent quarterly decline is the best guestimate. We can confirm by early February 2023.
There are several key driving influences for 2023. For the economy, growth is still hampered by Covid-19-related supply chain constraints. Inflation concerns are top of the Central Bank agenda, and interest rates are yet to peak. There is an uncertain impact of reopening of China. Also, 1/3rd of the advanced economies are heading for recession (IMF, Jan. 2023).
Unit demand has excess inventory that is still not purged from the supply chain. Shipment run rates are still well above the 8 percent trend line. It may stabilize by 3Q-23. In capacity, low utilization rates are set to plague 1H-2023. Capex is yet to peak, and, it will get worse, before it gets better. 2H-2021 capex splurge is only just now on stream, just as demand ebbs away.
Finally, ASPs decline is yet to reach the bottom. The long-term ASP trend is 0 percent, as far as the last 30 years. It is hostage to Moore’s first law. IC ASPs can eventually reach ‘one dollar’, as per Moore’s second law.
It’s a hype that single-digit negative growth in 2023 is a delusion. The market would have already reached the bottom. Even trail-blazing TSMC is warning of a lousy first half of 2023. Annualized growth rates are not looking good right now. All year-on-year growth rates are now negative (IC sales is at -20 percent). Units and dollars are still falling. We are at least two quarters away from the Golden Cross.
Don’t blame memory!
Don’t just lay the blame on memory! It’s a combination of everything!! There is the tight correlation between with and without memory. We are also seeing memory first to collapse, being a commodity, and then micro, followed by logic, and finally, analog.
The 2023 forecast for the global semiconductor industry is one of no change from May 2022 — it remains -22 percent at $447.479 billion! The industry is structurally cyclical due to supply-demand mismatch. It is impossible to achieve sustainable supply and demand balance. Demand can change very rapidly (up and down), while capacity can’t! Shortages are triggered by under capacity, and the excess capacity can cause oversupply. We need to build capacity to forecast oversupply, and build to order for undersupply. We also need a new industry model. The OEMs also need to share the capex business risk.
The memo to industry executives reads: ‘Could do better’. Take some lessons from Covid-19, where you didn’t see the toilet roll manufacturers rush to build new factories during shortage! They knew high demand was a pull-forward bubble. We can work in a lot more linear manner. We need to look at where the value add is, and follow the money. Eg., services are earning $450 per cm2. End equipment is earning $35, and semiconductors $9.
It is time for the industry to rethink the supply chain. Out with the ‘Me’ vs. ‘Partnership’ business model. Out with the near-term $ vs. long-term goals and shared visions. We need to be in with balance sheet security vs. near-term gains. We need total cost of the business vs. cost saving the detail. We need strategic visionaries vs. gaming the system. Right now, IDMs are enjoying a free ride ($35-$450 vs. semiconductor firms $9).
In summary, the 17th industry down cycle is now in full flow. We are seeing collapsing demand, coupled with increased capacity, and now, a global economic downturn. There is no change from 2022 forecast.
Global semiconductor industry’s 2023 growth is still forecast at -22 percent (low, single-digit looks ‘impossible’. Worsening economic outlook will likely prolong the downturn and push recovery out. The semiconductor industry is now (finally) acknowledging that 2023 will be negative. Forward-looking data is already showing double single-digit negative.
Future Horizons advices you to keep track of the industry fundaments – don’t overthink or overhype. It’s rarely ‘different this time’, as the cycles happen! Therefore, deal with it. Prepare for the double-digit recession, as there are no soft landings. Watch out for clues, and act decisively when needed. Double down on the R&D. Invent your way out of the problem. This is the time when the design houses, IDMs, etc., do very well.
It is too early to call the outlook for 2024. We will systemically get back to low, single-digit positive growth. Magnitude and timing depends on the depth and reach of the global economic slowdown/recession. It is time to start planning for the next upturn now! You can have the first-mover advantage. The 17th industry upturn’s just around the corner!