Sourceability Insights: November 2023 Market Update

The holidays are almost here! The days are growing shorter and the nights longer. As the weather dips and winter’s chill signals the incoming arrival of Jack Frost, many of us will soon be preparing our winter travel plans to visit family near and far. Now that the year is almost over, it’s time to start planning for 2024.?

2023 was the year of electronic component excess, and early 2024 might have its share of oversupply challenges. The booming demand for generative artificial intelligence (AI) has helped mitigate some challenges of excess inventory and low consumer demand, but it did not mend all of them. More concerning is that another component shortage could be on the horizon for specific semiconductor markets, particularly in memory.

Continued geopolitical volatility throughout 2023 led to further export restrictions on specific components and semiconductor manufacturing equipment. ASML has faced the brunt of these bans and might not be the only semiconductor manufacturing equipment maker facing these restrictions with the latest announcement from Canon.?

Shortage On the Horizon in 2024?

Is it too soon for another electronic component shortage? Apparently not. Over the last year, excess electronic component inventory became a formidable foe. As the worst of the semiconductor shortage began to wane in late 2022, original component manufacturers (OCMs) had been warning their clients not to over-order. Consumer demand started shifting early in 2022, as the world gradually opened after years of pandemic lockdowns and inflationary prices concerned many of an oncoming recession.??

The release of OpenAI’s ChatGPT and the unexpected boom in the popularity of generative artificial intelligence quickly reshaped 2023’s forecasted track. Excess electronic component inventory still piled up despite the reinvigorated market interest in AI-capable chips, leading to strategic production cuts within the memory market–which was hit the hardest by the consumer downturn. That being said, Nvidia, the leading supplier of powerful graphic processing units (GPUs) used within generative AI applications like ChatGPT, skyrocketed into the trillion-dollar club where few companies are members.??

This trend isn’t slowing down anytime soon.??

Despite a recent downturn in orders for Nvidia’s H100 chips by one of its biggest customers, Microsoft, this doesn’t indicate an overall decline. This just marked a surge of repeat orders for AI-related service applications still in relatively early development, like Microsoft’s Copilot. This program will likely need more extensive resources to mature, leading experts to remain optimistic that demand for GPU servers will continue to explode over the next 2-3 years with continued growth after that.?

There was already a bottleneck for AI chips in 2023, an indication of what could occur in 2024 and 2025. The constraint was mainly caused by Nvidia’s popular H100 GPU being exclusively manufactured by TSMC, which was already facing difficulties with production capacity for its CoWoS packaging. Insufficient production capacity also plagued the high-memory bandwidth (HMB) components needed in Nvidia’s H100. Currently, SK Hynix is the only HBM3 supplier. Samsung Electronics is expected to begin production in late 2023 or early 2024 to capitalize on Nvidia’s growing popularity.??

With these ongoing problems, despite efforts at mitigation, a gap of more than 35% between supply and demand for high-end AI servers could occur in 2023. Consequently, high-end AI server shipments in 2024 will be two to three times higher than this year. Over 2024, there will be significant preparations to increase production capacity, but it might not be enough. Especially for memory components needed in AI applications, after their strategic cuts throughout the year. As demand recovers, it will take time for memory OCMs to raise production capacity, contributing to a shortage of components necessary for AI applications.??

Keeping an eye on the market as trends evolve will be pertinent in the coming weeks.??

Chip Leaders Urge for More Diversification??

The global semiconductor supply chain continues to recover, but new challenges prolong its road to stabilization. While excess electronic component issues have become the new villain for the worldwide supply chain, shortages for some parts persist. To combat these problems, OCMs are working hard to increase their production capacities and global reach. Remaining complications have prevented a smooth transition into complete stabilization.??

The biggest problem remains the same as in the early days of 2020: the lack of diversification.?

Most of the world’s chip production still occurs in Southeast Asia, specifically Taiwan and China. No stranger to uncertainty, geopolitical volatility, and even weather phenomena, the lack of diversity among chip manufacturers has become a primary concern that causes many of the chip sector’s woes.??

This sentiment has led top chipmakers to pursue opportunities in expanding into other countries like India, Mexico, and the U.S. Government incentive programs to increase domestic resilience have opened the door for OCMs to spread their global footprint and enter territories they might have overlooked previously.??

However, the diversification problem only partially lies in the hands of OCMs to fix. Original equipment manufacturers (OEMs), contract manufacturers (CMs), and electronic manufacturing service (EMS) providers need to step up to the plate and do their part to mitigate the lack of diversification. Companies have to diversify where they order rather than depending on the same manufacturers located within the same part of Southeast Asia. Dozens of companies overordering from one manufacturer jeopardizes any diversification effort OCMs make.?

Tesla CEO Elon Musk noted this trend in a post on X, formerly Twitter. He said, “Never seen anything like it. Fear of running out [of chips] is causing every company to overorder—like the toilet paper shortage but at an epic scale.”????

Chipmakers have struggled to maintain supply and demand equilibrium, further complicated by pandemic lockdowns and high consumer demand. The solution to this problem goes back to diversification. Since this has been the norm for many years, pivoting will be difficult for many OEMs, CMs, and EMS providers. Even so, many Big Tech firms are beginning to realize the impact of an unstable supply chain—and the importance of correcting it.???

Musk says, “It’s going to be a challenging and long journey for them [tech companies] to diversify away and thinking about how long it takes for the chip development and cooperation—it’s going to take a while.”????

Tech firms are beginning to look inward for new chip designs, partnering with OCMs to create their chips. This is great progress, but it will take time for any of these solutions, especially new facilities, to make a noticeable dent. Most chip fabs being constructed outside of Taiwan aren’t expected to open until next year at the earliest, with many being pushed back to 2025 and 2026 due to labor shortages. Until then, experts like Musk are encouraging chip buyers to avoid over-ordering, as doing so is a self-fulfilling prophecy that risks supply chain stability.??

A Challenger Approaches: ASML To Be Dethroned???

Dutch company ASML Holding, the current leader in semiconductor manufacturing equipment, is being challenged for its crown. The Japanese camera and printer giant Canon has recently unveiled its latest “nanoimprint lithography” system to compete with ASML’s extreme ultraviolet (EUV) lithography machines.??

?Canon’s latest lithography machine, the FPA-1200NZ2C, recently made headlines. It can produce semiconductors equivalent to 5nm and as small as 2nm. This ability has garnered a lot of attention as leading chip foundries, TSMC, Samsung Electronics, and Intel race to become the leading supplier of 2nm chips by 2025.??

ASML’s EUV lithography equipment has become increasingly popular for this same ability to manufacture semiconductors at 5nm or smaller. Lithography machines, in general, are vital to aid manufacturers in effectively printing the design of a chip onto semiconductor materials. To complete this process, ASML’s machines use ultraviolet light. Something that Canon’s latest machine does not require.??

Canon said its machine doesn’t need a light source with a particular wavelength, reducing power consumption. Canon has been developing its nanoimprint lithography (NIL) technology since 2004, but it has yet to take off. With current sanctions and export restrictions on advanced semiconductor manufacturing equipment, Canon might slip into markets ASML is no longer allowed to enter, like China.??

Since Canon’s lithography machine can produce the same advanced semiconductors currently facing sanctions, it could eventually be under similar scrutiny. However, Chinese manufacturers might not need to be concerned if Canon’s latest machine is restricted too.??

Huawei recently released a new smartphone with a 7nm chip, a “feat seen as extremely difficult without an ASML EUV machine.” Likewise, China’s semiconductor manufacturing equipment companies have recently seen a spike in revenue and sales. If China lost access to Canon’s latest device, it might not be as disastrous as previously assumed.??

Global Smartphone Market Shrinks??

Smartphones, one of the most popular pieces of technology today, have had a rough year. Almost seven billion people globally own, at minimum, one smartphone. Despite these numbers, the number of active smartphone brands on the market is dropping.?

New data from Counterpoint Research states that smartphone brands have decreased by a third since 2017. Only 250 companies continue to produce smartphones today, and while that number might seem big, it doesn’t come close to the market’s original vast size.??

Why the decline? Was the global 2020-2022 semiconductor shortage so damaging it led to the consolidation of the smartphone market, much like how 2008’s DRAM crash left only a few survivors? Component shortages are a contributing factor. This much is true. However, the decline of competition within the smartphone market is not solely due to component shortages.???

Instead, the answer is much more straightforward. Smaller manufacturers have struggled to keep pace with more prominent device makers, like Samsung Electronics and Apple. Similarly, the transition to 5G made it much harder for undersized smartphone manufacturers to gain entry into this new arena. Many new and small manufacturers lack the capital or research to effectively breach this new world, unlike previous transitions from 2G to 3G to 4G.??

?Nowadays, fewer customers are interested in entry-level devices. Most customers want to upgrade an already capable device to a more advanced one, such as the latest Samsung or Apple smartphone. Unlike the giants, small manufacturers can’t keep pace with tech giants and invest enough capital into research or development to keep up. Since the early days, large manufacturers have significantly widened the gap between competition.??

Coupled with the difficulty of component procurement during the height of the pandemic, many small manufacturers lacked the buying power the large device makers possessed. Lacking crucial components means revenue suffered, further impacting purchasing power until nothing was left.??

For manufacturers still hanging on after the worst weeks of the semiconductor shortage, 2023’s sharp decline in consumer demand was the final straw. The smartphone market saw significant consolidation over the past few months, when phone shipments fell by nearly 10%. It marked an eighth consecutive declining quarter, with global smartphone production hitting a 10-year low concurrently. With no buyers, chips, or purchasing power, many had to close up shop.?

Research says that a return to a similar market seen in the 2010s, the height of smartphone popularity, is out of the picture. However, the booming popularity of AI could spark consumer interest, mainly if smaller smartphone manufacturers use these new opportunities to differentiate their products from industry leaders. More often than not, users look for devices that break the mold, not follow along. It remains to be seen precisely which and if any firm will capitalize.???

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.???