Robust growth for chip industry

Vital role: A robot conducting a guided tour for tourists at the Palazzo Madama museum in Turin. With AI and 5G dominating new technological advancements, it is no surprise that the semiconductor industry itself is a strong enabler of all industries. — AFP

AT the recent Semicon South-East Asia 2022 held in Penang, various papers and projections were made on the semiconductor sector as experts weigh in on the expectations of the industry.

The year 2022 is expected to be a robust year for the industry as consensus estimates that the semiconductor sector is expected to grow by 12.5% this year to US$625bil or RM2.76 trillion from US$555bil (RM2.46 trillion) in 2021, flatly beating the latest gross domestic product (GDP) growth forecast of just 2.9% by the World Bank and 3.6% by the International Monetary Fund.

In effect, the industry’s robust outlook has pushed market players to invest further with expansion across the globe, as chipmakers see a sustained demand outlook from various industries over the next five to eight years.

Within the industry, the test equipment market, which grew by some 30% in 2021, is expected to grow by a further 4% to 6% this year, while long-term expansion is driven by rising volume as well as the complexity of chips.

The assembly and packaging equipment market, which accelerated at an astonishing 87% year-on-year growth in 2021 to US$7.2bil (RM31.87bil), is still forecast to register decent growth this year and in 2023, mainly driven by demand for Advanced Packaging.

The key, as we have observed globally, especially among commodity prices as well as other raw materials, is the rise in average selling prices (ASPs) due to shortages, driven by supply disruption.

Interestingly, chip shortages – which hit the automotive industry first – have now spread to other industries too.

China coming in a big way in wafer fabrication

China, which accounted for about 11% of the global semiconductor fabrication capacity in 2019, is seeing massive investment by chipmakers, and China’s share of the global market is expected to hit 18% by 2025 and almost 19% five years later.

The Chinese chip market is expanding rapidly, leaving behind traditional chipmakers by sheer size and volume. In fact, according to Bloomberg estimates, 19 of the world’s 20 fastest-growing chip industry firms over the past year are from China.

Semiconductor capital spending is indeed growing with 200mm and 300mm major capacity coming on board right up to 2024.

For the 200mm fab capacity, some 25 plants are envisaged, both expansion of current capacity as well as new capacity, of which 12 will be from China, five from the United States, three in Europe, two each in Taiwan and Japan, and one in Malaysia.

In total, with the additional capacity, the 200mm fab capacity will expand by some 23% from 2020 to 2024.

In the 300mm fab capacity, the industry will be swamped with new capacity as some 67 fabs are expected to be on stream by 2024, of which 19 are from China, 17 from Taiwan, eight in Europe/Middle East, and seven each in the United States, South Korea and Japan, and two in Singapore.

All in all, the 300mm fab capacity is expected to increase by a whopping 54% between 2020 and 2024.

Semiconductors are the heart of new technologies

With Artificial Intelligence (AI) and 5G dominating new technological advancements, it is no surprise that the semiconductor industry itself is a strong enabler of all industries.

It is estimated that the semiconductor industry itself serves other industries with a total output value to the tune of US$40 trillion (RM177 trillion).

The top five sectors the industry serves include the energy and materials sector worth close to US$10 trillion (RM44.2 trillion), the technology sector valued at US$5.3 trillion (RM23.4 trillion), the retail sector worth US$5.1 trillion (RM22.6 trillion), the mobility sector valued at US$4.6 trillion (RM20.4 trillion) and the financial sector valued at US$3.2 trillion (RM14.2 trillion).

With startups and traditional incumbents continuing to innovate and disrupt the market, it is envisaged that the semiconductor industry itself will reach some US$1.35 trillion (RM5.97 trillion) in size by 2030 from just US$445bil (RM1.97 trillion) in 2020 – a three-fold increase.

Automotive sector-driven growth

It is not only Tesla that has revolutionised the automotive sector but the entire automotive universe is moving towards electric vehicles (EVs), autonomous cars and even smarter cars in terms of technologically advanced gadgets for modern driving pleasures.

With the semiconductor industry itself is envisaged to grow by 6% to 8% per annum between now and 2030, it is the growth from the automotive sector that will be the key to achieving the target, as the sector is poised to expand by 13% to 15% compounded annual growth rate (CAGR) between 2021 and 2030.

The demand growth from the automotive sector alone will see the sector accounting for 14% of total demand by 2030 from just 8% in 2021.

For computing and data storage, which accounts for 38% of current demand, the sector is expected to grow by a CAGR of 4% to 6% over the next 10 years while wired and wireless communication is envisaged to expand by a CAGR of 5% to 7% over the same period.

The industrial and consumer sectors are expected to grow by a CAGR of 6% to 8% and 8% to 10% over the next decade, respectively.

A word of caution

While one cannot deny that growth is indeed strong for the semiconductor industry over the next 10 years and recent shortages have also caused the ASP for chips to rise significantly, the sustained and rising demand has not only pushed established market players to expand capacity but has also invited new players competing with the global giants.

As production gets to be ramped-up with new capacity coming on stream, the demand-supply imbalance will likely head towards an equilibrium within the next one to two years, unless demand can still outstrip the robust market’s forecast.

Hence, like what we have observed in other industries, for example the glove manufacturers, the semiconductor industry too ought to be mindful of the pace and intensity of capacity increase as this could cause a significant margin erosion once the industry reaches an infliction point of an oversupply situation.

The semiconductor players are also facing severe labour and talent shortages and are paying top dollars for new talents as well as fresh graduates presently.

However, while the going is good, as market players expand their capacity and require added workforce, the industry could face dire consequences of layoffs and shutdowns when demand does not meet expectations or when the industry has expanded too fast to the extent that supply outstrips demand.

Judging by the performance of some of the global semiconductor stocks over the past couple of months, storm clouds are already gathering within the sector as demand is seen weakening on the back of slower global economic growth, which is slowly eating into business margins as ASPs for chips fall.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.

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