Global semiconductor industry forecast to grow +16 percent in 2024; But, it’s not yet time to pop champagne: Future Horizons

IFS 2024 was held today in London, UK. Has the chip market downturn come to an end? What fate now awaits the industry? Malcolm Penn, Chairman and CEO, Future Horizons, stated that the global semiconductor industry was forecast to grow +16 percent in 2024, and reach $608.186 billion. This is an upward revision from Sept. 23 single-digit number of 9 percent.

The bullish number is $628.849 billion at 20 percent growth, and the bearish number is $587.091 billion at 12 percent growth for 2024.

Q1 and Q2 should see high growth rates tailing off (base number impact). ASP impact should likewise also start to temper. Unit growth should return In 2H-2024. Low levels of capacity utilization is likely to persist throughout 2024. 2024 should see the market break the $600-billion barrier! The math is hard to call. So much depends on the timing of the events.

Industry outlook
First, the really good news! Downturn bottomed in Q1. The golden cross was breached in July. It’s sunny weather ahead. Downturn bottomed one quarter earlier than ‘4-quarter normal’.

An ultra strong Q2 was an unexpected big surprise. Even TSMC was warning of -4 to -9 percent quarterly decline. Logic, memory and micro were leading the way, with “AI/high-speed compute” driven, but, driven by ASP, not units. Q3 and Q4 mirrored Q2’s 6 percent annualized growth, but based off 2022’s market downturn collapse. After the 2022 crash, things were bound to get better. The question is: how much and how long?

Looking at semiconductor annualized growth rate trends, annualized monthly IC growth rate turned steeply positive in Sept. 2023. This was the impact of market collapse in Q3-2022. Growth is now measured against 25-30 percent lower baseline. Opto jumped too, but more in line with its ‘normal’ seasonal pattern. Discretes growth is still negative. Is that due to the impact of less severe collapse, or more representative?

The impact of memory was: it is two sides of the same coin. Only the amplitude of the swings is different. Both curves have been positive growth since Sept. 2023. For the first time since May 2022, Memory is now starting to positively contribute.

Now, there are four sides of the same coin. No sector is immune to semiconductor cycle impact. It was memory first, then micro, followed by logic, and then, analog (down and up). Analog ICs still have yet to recover. Will they do so in Q1-2024?

Europe finally succumbs
Europe has finally succumbed to the semiconductor industry. Strength in automotive and industrial sectors had sheltered Europe from downturn. After strength follows weakness. A weak economy now impacting Europe. Is this more indicative of the underlying market ‘recovery’?

Looking at worldwide IC annual growth rate unit and value trend, recovery in the market value is driven by IC ASP rebound measured against Jun 2022 collapse. IC unit growth has yet to turn around, let alone recovery. IC ASP growth rates are notoriously cyclical. And, never forget that long-term trend is zero.

Therefore, all that glitters is not necessarily gold! Earlier ‘recovery’ timing has impacted the math, not the analysis. If unit demand remains low, ‘recovery’ growth will stumble.

Current ‘recovery’ sales is not unit driven. Demand is still devilishly weak. Lackluster month-on-month growth rates lack momentum. High growth is being measured against last year’s low baseline. Annualized growth rates will flatten over the next four quarters. We need to differentiate between the math vs. the market. We also need to look at monthly trends and numbers, not just YoY growth.

Not yet smelling of roses!
The outlook ahead is not yet smelling of roses! In Davos Economic Forum, there were talks around economic potential of Generative AI, threat of escalation in Middle East war, Red Sea global supply chain disruption consequences, political impact from biggest election year in history, US Presidential election and return of Donald Trump, and Q1-2024 that saw Eurozone now formally in recession. Further, Japan GDP had dropped 1.4 percent in Nov. 2023 on export slowdown.

The semiconductor industry is advised to proceed with extreme caution. This is not the next super-cycle. It’s too soon to celebrate ‘chip market recovery’ whilst unit demand, ‘bread and butter’ products, and economic outlook still languish.

The economy is clouded in fog and uncertainty. US inflation outstripped forecast with rise to 5.4 percent for December. Eurozone is in recession, as rising prices have hit spending. Bloomberg Economics estimates price tag for war over Taiwan at $10 trillion or 10 percent of global GDP. Economic worries and new supplies have tempered outlook for crude oil prices. Boeing is not alone in suffering managerial/existence woes. Also, is the American raging bull market taking a breath or exhausted? The chip market needs a strong economy to flourish.

Unit shipments are still way below long-term average. It is currently 12.2 percent below long-term trend line (23.9 percent below 8.2b/week maxed out peak). We need 2-3 more quarters likely before balance is fully restored, with mid-2024 expected to be earliest. We cannot claim recovery until unit growth resumes.

Bill of materials (BoM) and quantity built determines units used. Inventory and lead time determines the units bought. Right now, we are still at the trough of units bought.

China capex worrying!
Capex has been running rampant. Massive capex surge is driven by 2022-23 shortages, and US hi-tech embargo on China. Capex percent of IC sales peaked Q1-2023 at highest rate ever, even beating Dot.Com bubble boom. There can be ‘4Q’ delay before capex spend equals net new capacity. New maxed out peak is now higher than prior 8.2b/week level.

Non-China capex cut back started on cue in Q2-2023, three quarters after the market collapse. Capex cutback is likely to continue for most of 2024, especially given the soft unit demand. China predatory capex behavior is a serious red flag.

China capex overspend is a ticking time bomb. ‘Buy anything’ capex surge is a direct result of US-led export license embargo. 2023 capex market share was up 30 percent vs. 2022, and 400 percent vs. 2012. Focus on mature nodes is potentially leading to severe oversupply / dumping. USA is nervous about ‘flood’ of older generation chips from China. We pray it remains uncrated in storage. We may otherwise have chip market apocalypse.

ASPS have moved from rout to recovery in under 12 months. IC ASPs are 16 percent higher than $1.35 pre-recession peak, and 42 percent higher than Jan. 2023 low. Don’t get too excited, as ASP cyclicality is notoriously volatile. The average growth is zero. We now expect to see an ASP correction in 2H-2024, especially given the industry overcapacity. The 400 billion $1.60 ASP IC unit market isn’t dominated by $40k nVIDIA AI GPUs!

Market forecast
Last year, we said the global semiconductor industry will be -22 percent. It was harsh, but negative growth message was more important than the number. However, what happened was -8.6 percent growth. 2023 is expected to be $524.162 billion — a drop of -8.6 percent.

Recovery kicked in one quarter earlier (big influence on the math). Economy proved more resilient than expected, with bewildering received wisdom. Market ‘rebound’ was driven by sharp recovery in ASP, which is still unclear, yet, why.

Growth momentum indicator is now sailing in blue skies. The next death cross is hopefully two plus years away, but it’s never plain sailing! Future Horizons forecast 2024 as a +16 percent growth for the global semiconductor industry.

Key takeaways
Hype springs eternal for generative AI. You can’t go to Amazon or ETSY and buy AI. It’s an enabler, not a market, as with IoT. In EV amd automotive, BYD sold more EVs than Tesla in Q4-2023, making it the world’s biggest EV maker. EVs include chips plus motor, battery, and now, ‘AI’. It has led to the auto industry Nokia moment!

Next, Moore’s Law has been killed more times than Dracula. However, Moore’s Law still lives, just different! In Apple vs. Microsoft, Apple is largely left out of the AI fervor. Microsoft is Open AI’s largest backer and cloud hosting provider, and pioneered in deploying AI chatbots across its search and workplace products. Nvidia is benefiting from a similar right place, right time, right product. There is a constant need to keep reinventing the wheel.

Chips are strategic! It is time to rethink the supply chain. OEMs are enjoying a free semiconductor ride — $35-$450 vs. semiconductor firms $9. We need to look at strategic visionaries, long-term balance sheet security, total cost of business, etc. We are now looking at ‘Partnership’ business model. and long-term goals and shared visions.

Semiconductor industry is structurally unstable. Shortages are triggered by under capacity, leading to under investment and increased demand. Oversupply is triggered by excess capacity, leading to over investment and market collapse.

It is impossible to achieve sustainable supply and demand balance. Demand can change very rapidly (up and down), but, capacity can’t! The industry needs a new model. OEMs also need to share capex business risk. This is what the semiconductor industry and the Chips Acts really should be focusing on. Whoever resolves this conundrum really will gain a strategic edge.

Points to ponder!
So, what’s keeping the chip industry executives awake at night? How sustainable is the current value-based rebound? Well, its not until IC unit growth returns. When will unit growth return? It’s unlikely before Q2-2024. Can the world economy continue to defy gravity forever? Extremely unlikely, but no-one knows when/how the correction will come. Is the current surge in ASPs a false dawn? Its part of the normal cycle.

Is the ‘recovery’ overstated, measured against last year’s bad data? Probably, yes! But, beware the risk of ‘spreadsheet’ vs. ‘real market’ recovery. Is this the start of next semiconductor supercycle? Well, not yet!

Is AI the next industry killer product or hype? Well, both-ish! It’s a product enabler. Will the Chip Acts save or overstimulate the industry? Both! Its the caveat emptor? Caveat emptor is a Latin phrase that translates to “let the buyer beware”. Finally, how will the current China policy play out? Its a case of right problem, but wrong solution?

Summary
The 17th semiconductor industry up cycle started in Q1-2023 (ASP, not unit driven). 2024 forecast is now +16 percent (+12 percent bear and +20 percent bull). Enjoy the value growth spurt. But, beware ‘spreadsheet’ vs. ‘real recovery’. Worsening economic outlook will push recovery into bear territory.

Now, more than ever, keep an eye on the data. It’s not yet time to break open the champagne! Keep track of the industry fundamentals – it’s rarely “different this time. Don’t overthink or overhype – AI is more artificial plagiarism, not intelligence! Finally, prepare for a slowdown in value growth and plan for an untick in unit demand. Keep your eyes peeled for clues. Act decisively when needed!