What is the future of the semiconductor industry in the downturn?

We all know that the semiconductor industry is cyclical, and it is particularly strong. After a great boom, a recession begins.

For example, in 2019, the whole semiconductor industry fell into the heaviest blow in 20 years. Semiconductor industry revenue fell by $412 billion, a year-on-year decrease of 12%. However, global semiconductor industry revenue climbed to $555.9 billion in 2021, a year-on-year increase of 26.2%. It hit an all-time high that year.?

Over the past 30 years, downturns in the semiconductor market have occurred every 3-5 years. This downturn would last anywhere from 12-15 months.

Today, because of the impact of the new crown epidemic, cyclicality and geopolitics, the semiconductor market is entering a rather special semiconductor cycle.

The semiconductor industry under the influence of industry cycle laws

The semiconductor industry has been the mainstay of the world economy since the 1960s. For more than 40 years, the revenue of the semiconductor industry had undergone several major changes: under the VLSI plan in 1978, Japan developed DRAM; the explosion of the PC era in 1980; the emergence of the mobile Internet in 2000; even because of the current Due to geopolitical factors, the entire semiconductor industry has experienced cyclical changes to varying degrees (see Figure 1).

Supply and demand in the semiconductor industry have been fluctuating non-stop. Severe depression can ensue after a surge in semiconductor sales. However, the price cycle of semiconductors is uncertain. The decline in prices will follow the reduction in the number of semiconductors. This is hysteretic.

But this does not include price changes brought about by some unexpected events, such as the outbreak of the new crown epidemic and some well-known factors. This has also led to uncontrolled chip prices.

So far, the cyclicality has been particularly pronounced in the consumer electronics industry. According to statistics, chips used in computers and mobile phones account for almost half of the $600 billion in chip sales.

The price of memory chips has fallen by two-fifths in the past year, according to Future Horizons research firm. And low-commercial logic chip prices fell 3%. CPU prices have plummeted.

According to Future Horizons, the semiconductor industry is about to face its worst recession since the dot-com bubble in the early 2000s. It was also one of the worst downturns in the history of the semiconductor industry.

But there's even worse, says Future Horizons' Malcolm Penn: Semiconductor industry revenue will return to $4,500 in 2023 after growing 4% in 2022. This means that revenues across the industry will fall by a quarter.

Semiconductor companies are not immune to traditional wafer cycle fluctuations. The laws of supply and demand affect this cycle.

In the entire cycle of the semiconductor industry, companies in the industry chain need to experience the survival of the fittest. Mergers and acquisitions, bankruptcy, exits from the industry, etc.

Companies face both challenges and opportunities in this particular semiconductor cycle.

On the one hand, because of the downturn in the development of the industry, the speed of bankruptcy of some companies may be accelerated. In recent years, many new companies and even old companies that have been operating for many years have gone bankrupt. Taking China as an example, from January to August this year, 3,470 companies with "chip" in their names registered for cancellation. This is more than in previous years.

The semiconductor industry is a capital-intensive industry. When the market becomes fiercely competitive, financing is difficult, and orders fluctuate greatly, some chip companies will find it difficult to survive. This situation will also lead to the withdrawal of some start-up chip companies.

But on the other hand, the industry's entry into a downturn has also given some companies new opportunities. This is a good time for them to gain market share. There are some businesses that can take advantage of this opportunity.

Such as innovative companies. As in previous semiconductor industry cycles, IC companies that are good at innovative research can always accelerate their development and stand out during market downturns.?

Self-rescue strategies for semiconductor companies

Under the current imbalance of market supply and demand structure, how can traditional semiconductor companies break through the cycle? How can new startups find their footing in the future? This is where it matters.

After entering the second half of 2022, the global semiconductor industry sales contracted. Companies in the semiconductor industry that have entered a downturn have made countermeasures. Many semiconductor manufacturers have reduced their spending budgets for the next two years. Because reducing capital expenditure is also one of the important measures to control the balance of supply and demand.

But some companies choose a different path. Texas Instruments, for example, has not slowed down the pace of research and development. The company is investing capital and building new factories as usual. As mentioned above, companies that stand out in a downturn have their own innovative research. Texas Instruments' resistance to the regularity of cycles has put other companies of the same type behind in the future.

At the same time, companies focusing on chip design have also been affected to varying degrees. The downturn in the consumer electronics market is also a major challenge for suppliers that mainly supply electronic consumer chips.

But their response is to turn to new markets. For example, Qualcomm, which has a strong position in mobile phone processors, has turned to the automotive field; China's domestic analog chip companies are entering high-end markets such as industrial and automotive.

Again, the semiconductor cycle mentioned above can facilitate the emergence of emerging technologies. The capacity utilization rate of fabs has declined, which means that new types of chip manufacturers have new opportunities for development. For example, optical chips, third-generation semiconductors, etc.

What will happen in the future

In cyclical industries, the end of the cycle is driven by changes in end customer demand. According to industry insiders, the current semiconductor cycle may take a long time to end.

But the downturn in the semiconductor industry will end with the advent of new technologies. At present, the emergence of terminal markets such as artificial intelligence, 5G, industrial automation, and new energy vehicles has brought a large amount of chip market demand. These end markets demand more chips than consumer electronics.

According to IC Insights, the semiconductor content in electronic systems will account for 33.2% in 2021. This is a high percentage.

In the future, semiconductors will still be a very solid industry, and it will be a steadily growing industry. I hope that semiconductor companies can find their own coping strategies! Overcoming the cycle, our future will be bright and bright!