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Is the Semiconductor Cycle Turning?

Lim Hui Jie wrote . . . . . . . . .

In the 1965 sci-fi novel Dune, civilisations across the entire universe fight for control over the spice melange trade. A line from the 1984 movie adaptation summarises its importance: “He who controls the spice, controls the universe.”

As explained in the novel, the spice, harvested painstakingly by filtering sand from the vast desert, enabled deep space travel so that trade could flourish and planets prosper.

To a certain extent, today’s semiconductors — essentially made from sand as well — are the spice melange in this millennium.

After all, semiconductor chips sit in the heart of countless devices ranging from the simple TV remote to a supercomputer that can process quadrillions of floating-point operations or flops per second. Without these chips, there would be no electronic devices beyond the simplest ones. There would be no smartphones, radios, TVs, computers, video games as well as advanced medical diagnostic equipment.

Throughout 2020 and 2021, these bits of silicon came under the spotlight when a spike in demand, coupled with closures of factories, ports and airports around the world, led to a global shortage of semiconductor chips.

The immediate impact was felt far and wide. Cars sat unfinished on factory floors while prices of laptops, smartphones and tablets soared. More than a year after its launch, Sony Group Corp’s newest flagship game console, the Playstation 5, is still not widely available while Samsung Electronics delayed the launch of its Galaxy Note smartphone until this year. Meanwhile, Japanese carmaker Toyota Motor Corp was forced to cut production by 40% last September. Other carmakers such as Honda Motor, Ford Motor Company and General Motors Company were similarly impacted.

Viewed from another perspective, in these two years, semiconductors were arguably the most sought-after commodity apart from masks, medical PPE and Covid-19 vaccines.

To alleviate the crunch and tame soaring prices, various semiconductor manufacturers promised capacity expansions with market-leading foundries like Taiwan Semiconductor Manufacturing Corp (TSMC) and Samsung Electronics, which makes chips based on the designs of customers, ramping up investment.

Similarly, Intel Corp, which designs and makes its own chips, is planning to pour substantial capital to raise both its manufacturing capabilities and capacity. In a Sept 8, 2021, report by Reuters, Intel announced it could invest as much as EUR80 billion ($123.85 billion) in Europe over the next decade and open up its semiconductor plant in Ireland for automakers.

Elsewhere, Intel announced In October 2021 it is spending US$20 billion ($27.11 billion) on a new plant in the US state of Arizona. Most recently on Dec 13, 2021, Intel announced it is spending US$7 billion to build a new plant in Penang, where it already has a significant presence for years.

“Industry players are responding to the chip shortage by building capacity, driving yields and supply as rapidly as possible,” Intel CEO Pat Gelsinger told a press conference in Malaysia on Dec 16, 2021. “Overall, the semiconductor industry this year will grow more than it has in the last two to three decades,” he adds.

Meanwhile, TSMC also reported in July 2021 that it plans to build new factories in the US and Japan after previously announcing it will spend US$100 billion over the next three years to expand chip-fabrication capabilities. TSMC also added it will expand production capacity in China and does not rule out the possibility of a “second phase” expansion of its US$12 billion factory in Arizona.

Supply and demand

However, the billion-dollar question (literally speaking) is this: With a surge of new supply projected to come sometime between this year and next year, will the market suffer from overcapacity? Could this then send semiconductor prices crashing, reversing the fortunes of semiconductor companies?

While this “boom and bust” phenomenon had happened regularly in the past, analysts do not think there will be a correction this year because the shortage is a bigger and more immediate worry although there will be some lifting of upward pricing pressure eventually.

In spite of any indications to the contrary, the industry is now at its all-time high. According to the Semiconductor Industry Association (SIA), global chip sales hit a record in 2021 at US$555.9 billion, up 26.2% over 2020. However, the US-based industry body expects a moderation this year, with an estimate of 8.8%. “It’s still really trending very strongly towards increased demand. We’re just not going to get this kind of slingshot effect that we had in the pandemic,” says SIA CEO John Neuffer of the much slower growth seen.

DBS Group Research analyst Ling Lee Keng tells The Edge Singapore that while the semiconductor sector has grown about 25% in 2021, she expects “high single-digit” y-o-y growth in 2022, in line with SIA’s estimates.

Ling expects the industry to hit a cycle peak sometime in 2023. “Then in 2023 or 2024, we could see a surge in new capacity, leading to a drop in the prices of chips,” she says, adding that the drop is only in the “single digits” and that the uptrend will remain intact, albeit at a slower growth rate. She expects the industry to grow at a CAGR of 9% from 2020 to 2025 which is expected to slow to 3% from 2023 to 2025.

PhillipCapital’s senior analyst Terence Chua agrees. “The current shortage is unlikely to be resolved by the end of 2022 and will actually follow through to 2023,” says Chua at a recent presentation.

Despite additional supply coming from the foundries, Chua expects these to be soaked up by strong demand from customers like Nvidia, which specialises in graphics processing capabilities that have found new use cases in crypto mining, and Advanced Micro Devices (AMD), which is competing more strongly than before with market leader Intel. He calls the oversupply concerns “overblown” and continues to be bullish on the demand for advanced nodes.

Unlike glovemakers setting up shop from scratch during the pandemic and hitting production targets within months, semiconductors are much more complicated to build and certify. Thus, it takes significantly more time to bring in supply from new plants, he adds. Says Chua, “Although Intel says we’re going to set up a new plant in Europe, in China and Arizona, it is not going to come onstream [quickly enough].”

“When you want to build an advanced chips plant like the way TSMC does, it takes at least one and a half years to do so. Sometimes, Intel even takes longer,” he adds. This could also be delayed by geopolitical problems around the world which could exacerbate the supply shortage although Chua admits it is difficult to gauge the exact impact of these developments.

Other analysts like Phelix Lee of Morningstar are more cautious. He tells The Edge Singapore that the semiconductor industry is “quite close to the peak” this year and expects the shortage to ease in the second half after carmakers resolve their shortage. Come 2023, prices should start moderating and while 2024 could see an oversupply situation happening as more new capacity becomes operational that year and bring about the “tipping point” from a shortage to an oversupply.

“Recent foundry announcements to expand will only add pressure to the next oversupply, as previous cycles dictate,” says Lee, noting that strong year-on-year increases in capital expenditure are often followed by significant slowdowns in market growth. These slowdowns are due to capacity momentarily expanding faster than demand, which leads to aggressive price cuts by foundries to sustain utilisation.

Source : The Edge Singapore

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