Global semiconductor industry’s ultra-strong Q2-23 an unexpected big surprise: Future Horizons

Global semiconductor industry has registered an ultra-strong Q2, according to Malcolm Penn, Chairman and CEO, Future Horizons.

First, the really good news! The semiconductor industry downturn bottomed in Q2-23. The golden cross was breached in July 2023. It’s sunny weather ahead! Second, the even better news! The downturn bottomed one quarter earlier than the ‘4-quarter normal’.

The ultra-strong Q2 was an unexpected big surprise. Even TSMC was warning of -4 to -9 percent quarterly decline. Logic and micro (AI) led the way. Timing has impacted the math, but not the analysis. Will the ‘recovery’ last, or wither on the vine?

Looking at semiconductor annualized growth rate trends, the annualized monthly IC growth rate jumped from ~ -24 percent (Jan-May) to ~-7 percent (Jun-Jul). The impact of June 2022 market crash is now measured against 30 percent lower baseline. The annualized IC growth rate is much flatter, moving forward over the next four quarters. We need to differentiate between the impact of the maths vs. the market.

Looking at the impact of memory, it is two sides of the same coin. Only the amplitude of the swings is different. Actually, it is four sides of the same coin! Recovery has happened across memory first, then micro, followed by logic, and finally, analog.

Worldwide IC annual growth rate unit and value trend reveals that ‘recovery’ in market value is driven by ASP ‘rebound’ based off June 2022 collapse. Beware of danger of ‘spreadsheet’ vs. ‘real market’ recovery? We also need to look at the trends and numbers.

The global economy is still plagued in fuzzy uncertainty. China, post Covid-19 has had growth disrupted by global economic slowdown, tepid domestic demand, ailing real-estate sector, CPI deflation, and record-high youth unemployment. The unpredictable regulations and sudden crackdowns are inhibiting entrepreneurial spirits. 2023 GDP growth downgraded to 4.8-5 percent, and 5 percent for 2024. China is no longer an unstoppable powerhouse set to displace USA.

India is standing by, poised to fill vacuum created by China, with 2023 GDP being 6.5 percent. It is now fifth-largest economy, contributing 15 percent to world GDP. Inflation continues to dominate Central Bank agenda keeping interest rates high. There have been some signs of cooling in the still tight US labor market resilience. High interest rates are starting to dampen consumer discretionary spending. House price inflation is driven by too few houses up for sale (interest rate trap). Despite headwinds and contradictions, S&P 500 continues to hit new highs, up 16 percent YTD.

Importantly, China’s four-decade economic miracle is now starting to fade. Inflation has fallen dramatically from its 2022 peak. It is still stubbornly higher than its 2 percent goal. Ongoing pressure on interest rates will continue, until inflation dragon is slain.

Excess inventory is still burning! July shipments run-rate was 6.8 billion units/week vs. 8.2 billion peak (down 18 percent). Current run-rate is down 7 percent from actual demand (deficit is inventory burn). Inventory depletion is still unlikely over before Q4-2023 (and, longer if end demand softens). We are in the eighth consecutive month of below trend line unit shipments. Do we have ‘12 more’ to go? LTA’s prolonging inevitable downturn excess inventory adjustment.

The past four corrections took 8-10 quarters. 1996, 2001, and 2011 capex bottom was at 7.5 percent for global semiconductor sales. 2007, though shorter, was worse at 3.7 percent. The outlook for 2023? Based on past history, bottom out Q2-2025 at 7.5 percent semiconductor sales. That’s potential double whammy of slowing Western market and restricted China sales.

ASPs had plummeted, with recovery in progress. Steady ASP recovery was from Dec. 2020-May 2022. This was driven by strong unit demand, maxed out capacity, and product shortages). It plummeted in June 2022, wiping out 85 percent of previous 18 month’s gain in one month. Once supply exceeds demand, ASPs plummet to cost ‘keep the books full, as any order’s a good order.’ We have seen sharp YoY rebound in June 2023, with more math vs. recovery. Logic proved remarkably resilient, predominantly custom SoCs? The long-term trend is zero! The ups and downturns had been straight out of the book.

Revised forecast
IFS 2023 forecast is still -22 percent. The Q1 actual results were -8.2 percent, close to the Jan. 2023 bull forecast scenario. The -26 percent worse case bear scenario is now, and not likely to happen. It has also skewed our overall forecast closer to the -17 percent best-case scenario.

Stronger Q1 pulled the forecast outlook slightly better. Shift though was modest and well within the forecast margin of error. Nothing of substance had changed from Jan. 2023 (May 2022) analysis. We have a formal change to our -22 percent number for 2023, but -20 percent is more likely. Strong negative growth year message means critical priority, given that there is still prevailing industry denial.

Q2 actual results should be +6 percent for the global semiconductor industry. Massive swing statistically, from -5 percent to +6 percent. There is relatively modest $13 billion revenue impact, from $233 billion to $246 billion. Timing is critical, and small change early on has big impact on the number!

The overall status is nothing to write home about (either way). Chip industry needs a strong GDP to flourish. Units will eventually sort themselves out. Excess capacity will keep overall sales value depressed. ASPs will slowly trend back up the recovery path

2024 outlook
Looking at the outlook for 2024, we should be statistically back to high single-digit growth. The magnitude and timing depends on inventory burn and the economy.

Downturn bottomed in Q1-2023, which was one quarter earlier than the ‘4Q normal’. With uncertain recovery outlook, inventory, capex, and economy are causes for concern. The 2023 growth is now -10 percent vs. -22 percent Jan. 2023 (Mar. 2022) forecast. There is impact of the math, not the analysis. Beware the ‘spreadsheet recovery’ false flag! Be also wary of the capex sword of Damocles. Capex spend is at a historic record high. If all converts into capacity, the chip industry will choke.

There are sunny skies ahead. The 18th global semiconductor industry upcycle has started. But, don’t throw away the umbrella. There are squalls and showers ahead too! Enjoy the inevitable brickbats — Penn’s -22 percent forecast was wrong. ‘Number’ was hostage to math, but the analysis was spot on. No-one else forecast negative growth. If vou value forecast number, more than the analysis, we too could keep changing. Our forecast is homing in on the final number. That’s ego, not substance. We only update ‘the number’ when something of substance happens, like now!