Sourceability Insights: December 2023 Market Update

The nights may be long, but the familiar appearance of glittering holiday LED displays will soon replace that melancholy with cheer! The end of 2023 is upon us, bringing with it a close to another year of ups and downs in the electronic component industry. 2023 was a little different, that’s for sure. Excess inventory became a significant challenge to the vulnerable global supply chain, but shortages in specific component markets continued.??

During the first half of the year, memory manufacturers initiated strategic production cuts, to stifle the spread of excess inventory. Meanwhile, passive component suppliers experienced raw material shortages and logistics challenges that kept product lead times high. Sourcengine’s latest Lead Time Report indicates that there could be some major changes in 2024.??

We’re getting ahead of ourselves. With one month left, significant and unexpected changes might still be in store before the New Year finally arrives. Around this time last year, OpenAI unveiled its latest product, ChatGPT. This large language model that utilizes generative artificial intelligence to formulate responses took the world by storm this time last year. It can be argued that excess electronic component inventory concerns were lessened thanks to the ravenous demand and popularity of generative AI thanks to ChatGPT.??

Currently, there isn’t another golden AI goose waiting in the wings, but we won’t count our chickens before they hatch. Keeping an eye on the market over the coming weeks will be imperative to formulating a strategic plan for 1H24, especially if a dark horse like ChatGPT arrives alongside Santa’s sleigh.?

Poor Holiday Shopping Season Coming? Apple Sees Declines.?

The holidays are finally here. During late November and through December, organizations worldwide experience their peak shopping season. It comes as no surprise, given that this time of year is the most associated with gift-giving and annual product sales. Many consumer electronics manufacturers release new products around the end of the year to capitalize on the approaching holiday season.?

Tech giant Apple is no exception. New releases of the latest iPhone, iPad, iMac, and other products become available around late September. Being one of the most popular consumer electronics brands, Apple’s holiday sales often reflect ongoing market trends. Based on sales forecasts for the holiday quarter, it might be a slow season for many consumer goods manufacturers.

According to Apple, weak demand for iPads and wearables is causing some concerns. Tim Cook, Apple’s Chief Executive Officer, insists that Apple’s latest releases, such as the new iPhone 15, are doing well despite the ongoing resurgence of local smartphone brands and Huawei in China. Chief Financial Officer Luca Maestri said Apple will likely see sales similar to the previous year. While impressive, it is not on par with Apple’s usual strong numbers.??

Maestri said, “Apple expects to have higher iPhone sales for the fiscal first quarter, even though this year's holiday quarter has one fewer week of sales than the year-ago.”?

However, Apple’s latest high-end handset models, such as the iPhone 15 Pro and the Pro Max, face supply constraints. Uneven economic recovery in China has contributed to many consumer electronics manufacturers seeing poor sales performance.??

Similarly, tougher competition in the Chinese markets from local smartphone brands and Huawei Technologies returning to the field with domestically made chips is shutting out foreign companies like Apple.??

Cook said Apple was "working hard to manufacture more" iPhone 15 Pro and Pro Max devices. "We do believe that later this quarter, we'll reach a supply-demand balance."?

The personal computer market is also expected to fare better in the coming year, but Mac sales are still slumping by a third compared to expectations. Apple's wearables and iPads continued to follow the year’s declining trend this quarter. It is likely that most other consumer electronics manufacturers, even those in their domestic markets, will see a stifled performance as consumer confidence remains low.???

Geopolitical volatility and excess inventory will continue to impact sales over the holiday quarter, but expectations are high that 2024 will be the year of a rebound.??

Global Semiconductor Manufacturing on Track for Recovery in 2024??

According to a report by SEMI and TechInsights, the worldwide semiconductor manufacturing market is expected to recover in Q4 2023.?

"While semiconductor markets have seen year-over-year declines the last five quarters, year-over-year growth is expected to return in the fourth quarter of 2023 as production cuts have worked their way through the supply chain," said Boris Metodiev, Director of Market Analysis at TechInsights. "On the other hand, front-end equipment sales have been performing much better than the IC market, buoyed by government incentives and the filling of backlogs, strength expected to continue next year."?

Clark Tseng, Senior Director of Market Intelligence at SEMI, agreed with these sentiments. "Despite low fab utilization rates and slowing capital expenditures in the second half of 2023, we expect back-end equipment billings to bottom in Q4 2023," he said. "This will mark an important turnaround for the chip manufacturing industry, signaling a recovery from the downturn with building momentum in 2024."?

While consumer electronics might face a stiff holiday shopping season, electronic sales are expected to climb by 22% quarter-over-quarter (QoQ). IC sales, which experienced a rough year, are expected to see a 4% increase as inventories stabilize.??

Despite the good news, it will still be a soft quarter for most electronic sectors. Fab utilization rates and capital expenditures will face continual declines during 2H23. Memory products still have another quarter of poor sales before actual growth begins. Even non-memory products, which have outperformed memory for much of the year, are seeing weak orders.??

It could have been worse. The contraction of wafer fab equipment spending was much shallower this year than previously expected due to successful mitigation strategies and strategic production cuts. Further development in technology and the rising popularity of AI will likely bolster recovery efforts in 2024.??

China Working with Micron and ARM?

China is hard at work improving its domestic semiconductor capabilities after a year of ongoing sanctions and export restrictions. Like most other countries, China has passed several incentive programs to fund the construction of new semiconductor facilities by domestic and foreign original component manufacturers (OCMs). Beyond new fabs, China is also working with leaders within the semiconductor industry to improve their domestic product lines or resolve challenges.??

Over the summer, the Cyberspace Administration of China (CAC) said that memory giant Micron Technology had failed to pass a cybersecurity review. The CAC noted Micron’s components caused “significant security risks to our critical information infrastructure supply chain, which would affect national security.”?

As a result, Micron’s products were barred from sale to organizations that possessed “critical information infrastructure.” According to Holden Triplett, Founder of Trenchcoat Advisors and a former FBI counterintelligence official in Beijing, these actions were mostly seen as retaliatory for U.S. export restrictions rather than a failure on Micron’s part. Most of Micron’s memory chips sold in China are used in consumer electronics, like smartphones and notebooks, which are not considered threats to national security and were unaffected by the ban.?

A few weeks later, Micron made a $600 million investment to upgrade its chip packaging facility in Xi’an, illustrating Micron’s commitment to China’s electronic component industry. More recently, China’s Commerce Minister told Micron Technology’s President, Sanjay Mehrotra, the company is welcome to deepen its footprint in the Chinese market. Mehrotra continues to “express willingness to expand [Micron’s] investments in China,” especially now that the relationship between the country and the company continues to warm.??

Simultaneously, ARM China, the Chinese branch of renowned chip designer Arm, is engaging with local developers to boost domestic, collaborative efforts through its recent “Smart IoT EcoSystem Seminar.”?

"China is one of Arm's fastest-growing markets,” Drew Henry, Arm's Executive Vice President of Strategy and Ecosystem, said. “Arm has a close collaborative relationship with ARM China in the Chinese market. In the first half of this year, Arm's authorized customers in China increased by 10%. Among Arm's 15 million developers worldwide, four million come from China. Arm continues to invest in China, and it is Arm's long-term commitment to help Chinese companies serve customers worldwide."?

ARM China is committed to developing IP products that meet global standards and local needs for China's chip industry. These new products utilize Arm’s chip architecture and innovation capabilities in order to continuously improve. As Arm’s largest market, ARM China has an exclusive and permanent right to license and sell ARM IP within China,??

Data gathered from ARM China reveals that it has authorized its self-developed products to over 160 local customers, and its chip shipments exceed 200 million. Through ARM China’s help, many Chinese customers have achieved breakthroughs and successes in product research and development.?

ARM China has worked on “its self-research business based on the needs of the Chinese market by focusing on heterogeneous and intelligent computing and strategically selects AI, CPU, information security, and multimedia, launching processor product lines and achieving mass production.” The company plans to continue working alongside domestic organizations to further expand into the Chinese market while China focuses on improving its own self-reliance.?

Microsoft Announces Custom AI Chip?

Microsoft has just unveiled its two latest chips, Maia and Cobalt, aimed to help achieve competitive artificial intelligence (AI) goals.?

Maia 100 is an AI chip, and Cobalt 100 is an Arm-designed chip, both act as challengers to Nvidia’s highly sought AI GPUs and Intel’s processors, respectively.??

Over the next year, Microsoft plans to make these chips commercially available via its cloud services but has no plans to sell them. Through Microsoft’s Azure cloud, virtual-machine instances running Cobalt chips will become available in 2024. Maia has no release timeline yet, but it is said to speed up computing tasks and provide a foundation for its artificial intelligence “Copilot” service for business software users. Maia is designed to run large language models as part of a collaborative effort with ChatGPT’s creator, OpenAI. However, Microsoft will still utilize Nvidia and AMD’s chips for its Azure cloud services.?

Special AI chips from cloud providers might be able to help meet demand when there’s a GPU shortage. But Microsoft and its peers in cloud computing aren’t planning to let companies buy servers containing their chips, unlike Nvidia or AMD. These custom chips, however, will help meet demand when there’s a GPU shortage. With AI’s popularity, it's no surprise that there were already bottlenecks for Nvidia’s GPUs over 2023.?

Microsoft is currently testing how Maia 100 stands up to the needs of its Bing Copilot, the GitHub Copilot coding assistant, and GPT-3.5-Turbo, a large language model from Microsoft-backed OpenAI. OpenAI has previously trained models on Nvidia GPUs in Azure.?

In addition to its new chips, Microsoft has devised a custom liquid-cooled hardware called Sidekicks. The hardware is designed to fit into racks next to those containing Maia servers without the need for retrofitting to help solve the limited data center space problem.??

With the oncoming rollout, based on Amazon’s experience with its custom solutions, Microsoft believes it could see faster adoption of the Cobalt processors over the Maia AI chips. Microsoft is currently testing Teams and its Azure SQL Database service on Cobalt, and the results have been promising. Already, these programs have performed 40% better than on Azure’s existing Arm-based chips.??

Sourcengine’s Q4 Lead Time Report??

In the latest Sourcengine Lead Time Report, market data revealed that continued raw material shortages still impact PEMCO markets, contributing to high lead times and prices. Some regions in the global market see some constraints, while others might not. This can be seen with the EU's multi-layer ceramic capacitors (MLCCs), as a ceramics shortage has consistently kept prices high for EU buyers over APAC and NA procurement teams. These thermal management and power product challenges will likely persist in Q1 2024.???

The most significant change, however, will be in memory.??

According to OCMs and market trends, a rebound is coming in the semiconductor market. In 2023, DRAM and NAND-flash saw some of the lowest drops out of the semiconductor product market. Low consumer demand fueled by recession concerns led to a significant drop in orders, giving rise to excess electronic component inventory. Samsung Electronics, SK Hynix, and Micron Technology, three of the largest suppliers of memory components, initiated strategic production cuts to stifle the growing wave of excess inventory quickly. Even South Korea saw an impact on its economy since memory components are one of the country’s main exports.??

Now, the bullwhip is cracking in the opposite direction.?

2023 has been the year of AI, thanks to the ever-popular ChatGPT. Demand for AI applications and capabilities has increased as tech companies raced to introduce chatbots and other large language models with ChatGPT’s features. Orders for Nvidia’s popular flagship GPUs, such as H100, contributed to component bottlenecks and excessive financial power to meet the often over $10,000 price tag per GPU.??

This rise didn’t impact GPUs alone but has steadily trickled down to affect other semiconductor markets, including memory, such as DRAM and NAND-flash.??

Reports indicate that semiconductor demand will return to normal as excess inventory is mitigated through Q4 2023 and Q1 2024. There is concern that a shortage in the memory market will recur as orders pick back up due to the necessary production cuts manufacturers made throughout the year.??

Despite endeavors to increase facilities, many still have a few years to finish construction, and the labor shortage continues to leave many new fabs unable to begin operations. AI is expected to dominate for a second year in a row, and if it does, another electronic component shortage might be on the way. In the coming weeks, keeping a close eye on market shifts with real-time data analytics from tools like Datalynq will be imperative for 2024 supply chain strategies.??

Want to learn more about component lead times, price trends, and availability from your favorite manufacturers? You can download Sourcengine’s complete Lead Time Report for free on our site for more information on market trends, component availability, and industry news.??