Until earlier this year, the biggest challenge facing the global semiconductor chips industry was scarcity. During the pandemic, the demand for these chips increased. Global chip sales grew 26.2% in 2021, higher than the 6.3% projection made by the Semiconductor Industry Association (SIA) at the end of 2019. Top semiconductor players announced expansion plans. Venture capital investment in semiconductor startups more than tripled in 2021.
This year the mood has changed. Market leader Intel cut its financial outlook for this fiscal year, even as its revenue declined in the latest quarter. Micron Technology said this would reduce production. The change is reflected in the financial markets. Shares of major semiconductor players have declined, and the Philadelphia Stock Exchange Semiconductor Index, an index of 30 semiconductor companies, has fallen 24% this year, while the S&P 500 index is down 13.6%.
The semiconductor business has been plagued by boom and bust throughout history. The cycle is usually driven by supply-side changes. It is a capital-intensive business, with a long holding period. Manufacturing capacity is added piecemeal, while demand slows. This leads to a build-up of inventory, which is usually followed by a recession.
This build-up of inventory is one reason for the current negative outlook, but this timing is different. One, while some segments (mobile phones and computers) create inventory, others (automotive industries) lack. Second, there are significant capacity expansion projects in the pipeline, partly due to geopolitical concerns.
post-pandemic glut
In 2020, the pandemic made work from home the new normal, fueling demand for computers and smartphones. The used equipment market was flourishing as manufacturers struggled to keep up. That, in turn, increased demand for semiconductor chips, which are an essential component in electronic devices. However, in 2022, demand for both computers and smartphones declined due to an economic slowdown in key markets including the US and Russia’s invasion of Ukraine among other factors.
While smartphone shipments globally declined by 8.7% in the second quarter of 2022, in the same period of 2021, shipments of personal computers declined by 15%. “What started out as a supply-constrained industry earlier this year has turned into a demand-constrained market,” Nabila Pople, research director for IDC’s Worldwide Tracker team, said in a statement. In addition, companies hoarded chips during boom times, expecting shortages to continue. This will affect new orders until the chips are used up.
regional differences
However, what is true of mobile phones and computers is not true for some other segments, which are still facing shortages. Like smartphones and personal computers, automotive sales are falling, but the latter are still being shaped partly by supply constraints. According to Cox Automotive, in the US, automotive sales in the first half of 2022 are projected to decline 17% compared to the same period last year.
India’s top carmaker Maruti Suzuki lost sales of 270,000 cars without bookings during 2021-22, its chairman RC Bhargava informed shareholders in the company’s recent annual report. It is difficult to resolve the coexistence of shortfall in one segment and excess supply in another. The devices and processes that are used to make one type of chip cannot be easily switched to make other types of processes. Many in the industry expect the barriers to ease later this year.
capacity expansion
In addition, there is bound to be a significant increase in capacity. Global chipmakers, including the largest foundry TSMC, are planning to invest billions of dollars in capacity expansion. The glut in the mobile segment appears to have delayed these investments. For example, TSMC has cut its spending plans for 2022 from $44 billion to $40 billion, but intends to spend the balance in the next fiscal year.
In addition, there is a global race between countries to build their domestic semiconductor industry. The new CHIPS and SCIENCE Act in the US includes a $52 billion subsidy for the semiconductor industry. Last year, the Government of India had approved Rs 76,000 crore scheme to boost domestic semiconductor production. It is not clear whether these schemes will achieve their goals in the short run. However, his argument is that the demand for semiconductors will continue to grow. Despite the regular slowdown, expect demand to pick up.
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