Cyclicality is back in the chip market
A deteriorating global economy — causing a slowdown in business investment and reducing disposable income, weakening consumer demand — will continue to impact the current semiconductor market dynamics and the chip inventory levels that are affecting the electronics industry.
Navigating the Dynamics of the Chip Market
The semiconductor market is entering into a major correction cycle as demand for PCs, smartphones, tablets and consumer electronics has significantly declined. In the fourth quarter of 2022, the Gartner Index of Inventory Semiconductor Supply Chain Tracking (GIISST) entered the moderate surplus zone. While the overall index is no longer in a shortage zone, there are still inventory imbalances, with an abundance of some chips and the unavailability of others (see Figure 1).
Figure 1: Gartner Index of Inventory Semiconductor Supply Chain Tracking – Projected Worldwide Semiconductor Inventory Index Movement, 2022-2023
Source: Gartner (March 2023)
For example, the memory market will see significant oversupply for most of 2023 due to weak end-equipment demand, despite the slowdown in production by vendors. Analog components are also headed to an oversupply due to weakening demand and new 300mm production capacity from vendors. On the other hand, optoelectronic chips continue to see inventory depletion as OEMs’ panic-buy from LED vendors amidst ongoing COVID-19 uncertainties in China.
Overall, most chip categories are exhibiting an improvement in inventory. Semiconductor demand from consumer markets continues to deteriorate due to the weakening macroeconomy, easing shortages. There is a high chance of non-consumer markets – including networking, servers, storage – following a similar trend in 2023, which will help further ease inventory imbalances and reduce pricing. The inventory index is expected to continue increasing until the second quarter of 2023, before it starts to recede as demand picks back up.
The Effects of Changes in Semiconductor Inventory Levels
Changes in inventory levels directly influence revenue growth. Sudden changes in supply and demand affect the average selling prices (ASPs) of semiconductor devices and disrupt inventory in the supply chain.
OEMs remain aggressive with inventory management, significantly reducing shelf inventory and increasing cautiousness with forward orders. Production forecasts have been reduced for various electronic equipment types, which is affecting chip unit shipments and pricing. Fluctuating chip prices have been the key influencing factor driving short-term changes to semiconductor revenue forecasts.
Given that Gartner projects the semiconductor inventory index to remain within the surplus zone through 2023, this will put pressure on chip pricing and lead to a slowing market. Gartner is forecasting total worldwide semiconductor revenue to decrease 6.5% in 2023 to $562.7 billion. The market is expected to recover in 2024, growing 16.3% to reach $654.3 billion in revenue (see Table 1).
Table 1. Semiconductor Revenue Forecast, Worldwide, 2022-2024 (Billions of U.S. Dollars)
Source: Gartner (March 2023)
The Impact of Slowing Semiconductor Demand on Chip Manufacturing Market
Semiconductor demand weakness is rippling through the supply chain, impacting semiconductor capital spending and wafer fab equipment (WFE). Gartner is forecasting a 19% drop in both capex and WFE spending for 2023. Geopolitics is also impacting the global semiconductor manufacturing landscape.
Recent export controls and restrictions by the U.S. on the sale of WFE specific to logic and memory technology nodes will have a major negative impact on capex by firms operating fabs in China. While Samsung, SK Hynix, and TSMC have been given blanket approvals for these controls, they will likely adopt a conservative approach in any further capacity expansion in China. Domestic Chinese players focusing on advanced nodes will be hindered in buying WFE, which will negatively impact capex.
In the U.S., the recently passed CHIPS and Science Act established subsidies for fab construction, leading to a flurry of new fab and capacity expansion announcements. It will be critical to see how companies spend as they use the funding from the Act, as current market conditions are not favorable. Companies will likely focus on building fab shells that have the longest lead times and then will bring in equipment as needed. The European Chips Act (EU) and similarly aggressive policies worldwide in regions such as mainland China, India, Japan, South Korea, and Taiwan will incentivize chipmakers to leverage that funding for further expansion.
This article is authored by Gaurav Gupta, VP Analyst at Gartner.
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