Buyers such as auto producers can expect lower costs and shorter lead times, but with risks of a reversal in late 2023
However, falling sales are bad news for chip-exporting markets, such as South Korea and Taiwan. MNCs should adopt a more defensive stance in these markets, but also globally, as semiconductors are a bellwether for global demand. A tight chip market could re-emerge in late 2023, prompting renewed supply chain stress. Remain vigilant with supply chain management.
Overview
The pandemic saw surging demand and disrupted supply chains in the semiconductor industry, producing shortages, price increases, historically low inventories, and longer lead times. With supply returning just as demand begins to slow, the industry is entering a correction. A number of factors are weakening demand:
- Consumers are pivoting their spending back to travel, leisure, and services.
- The pandemic electronics boom is ending. Inflation-adjusted US IT/computer investment dipped 10.8% in Q2. Global smartphone sales growth is negative for the first time (excluding 2020) since 2013. The crypto crash is causing plummeting demand for graphics cards.
- Retailers built up too many inventories, leading to a correction via reduced orders, now moving up the supply chain. South Korean YOY chip inventory growth reached a four-year high of 79.8% in June.
- Weakening macro conditions are squeezing discretionary spending globally.
Our View
The semiconductor industry is undoubtedly entering a slowdown, but the aggressive drop in demand is potentially overshadowing longer-term sources of demand strength, such as automotive electronics, AI, and cloud computing. Short-term demand weakness has seen CAPEX plans scaled back, reducing production capacity going forward. Long lead times for fabrication plants raise the chances this could be an overshoot, as medium-term demand could be more resilient than expected. This might mean a return to tightness in late 2023, compounded by lingering supply bottlenecks. Lithography equipment used in chip production is one key concern. Currently having a lead time of up to two years, shortages are expected to worsen in 2023. On the whole though, we expect a gradual easing in semiconductor supply conditions, as investments spurred by the high prices of the past 18 months come online.
The combination of falling demand and a gradual easing in supply constraints should see a price fall in chips in the next nine months. However, the risks of a supply overcorrection and ongoing supply disruptions could see rebound tightness emerging by EOY 2023, prolonging supply chain stress in other industries and feeding elevated inflation.
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