Longer-term prospects for the industry will be dictated by public policy
Following two years of widespread shortages, supply conditions have eased for some (but not all) types of chips. Firms dependent on semiconductors should analyze their product mix and supply chains to ensure resilience against supply shocks. MNCs should also keep abreast of policy developments in major chip-manufacturing markets to make the most of potential incentives—and to avoid getting caught out by legislation. Given that chip manufacturers often increase CAPEX during downturns in anticipation of the recovery, B2Bs selling to the sector should ensure they are well positioned to capture potential opportunities. Finally, firms in the automotive sector should continue to expect improvements in prices and lead times, but backlogs will remain throughout 2023.
- In recent months, the chip industry has experienced a notable slowdown: sales in December were down 16% from their peak in May 2022.
- Demand for memory chips (those used in consumer electronics such as computers and mobile phones) is particularly subdued; high inflation and the gradual return to service consumption following the pandemic are to blame for the lower demand.
- Lower demand for memory chips is also the result of a correction in inventories; last year, vendors overestimated demand, which shifted the situation from shortage to oversupply. Offloading these inventories has corresponded to a fall in orders.
- Other, more basic chips are still in high demand, mostly from industrial and automotive sectors still facing enormous pandemic-induced backlogs.
- Meanwhile, the US, China, and Europe are all developing aggressive industrial policy with the aim of boosting their respective chip industries: the Biden administration has dedicated US$ 280 billion in incentives under its CHIPS Act and heavily restricted the export of semiconductors to China.
The chip industry is a notoriously cyclical one, and 2022 was a prime example of that. The year started with strong activity, as MNCs looked to capitalize on still-high demand for electronics. However, macroeconomic headwinds and oversupply of certain chips led to a subdued second half of the year.
In the near term, oversupply will likely continue to be the name of the game for memory chips. FrontierView expects high inflation to weigh on consumer spending, notably on big-ticket items such as televisions and computers. Meanwhile, big production plants coming online (from big manufacturers such as TSMC, Samsung, and Intel) in 2023 and 2024 will greatly increase supply.
The longer-term outlook for the chip industry is mixed. On the one hand, secular increases in demand will continue to make it a high-growth industry: in the auto industry, this will mostly be due to the ever-growing share of chip-heavy electric vehicles, but also thanks to the increasing digitalization of traditional combustion engine vehicles. In industrial sectors, demand will be driven by the increasing use of labor-saving technologies, while the widespread and fast-growing use of AI will boost the need for processors.
On the other hand, repercussions from aggressive policy moves in major chip-manufacturing economies could lead to a global fragmentation of the industry, thereby confining supply/demand dynamics to regional silos, i.e., oversupply of chips in China would be unable to assuage shortages in the West. This would reduce efficiencies and put upward pressure on prices. Such moves will also force certain manufacturers to “choose” between the US and China. MNCs dependent on chips in their supply chains should be doing contingency planning for this eventuality, as current geopolitical and policy trends indicate it is very possible.
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