The semiconductor industry, which has enjoyed a bull run throughout most of 2020 to 2022, is showing more signs of slowdown as demand eases off and supply catches up.
Following two years of strong demand, a global slowdown, rising inventories, the Russia-Ukraine war, as well as a shift from goods to services and essentials have emerged as threats to end that run, says Credit Suisse at its 23rd Asian Technology Conference on Sept 6.
In stark contrast to the mad scramble for supply during the pandemic, companies along the semiconductor supply chain are now reversing their inventory building. Asian semiconductor players, critical nodes of this global industry, have started seeing declines in the second quarter of this year and Credit Suisse expects the trend to continue for the next two to three quarters.
Randy Abrams, head of Asia semiconductors securities research at Credit Suisse, says that while there is an overall slowdown in Asian semiconductor stocks, there is also “bifurcation” in terms of prospects — echoing the trend reported by The Edge Singapore recently.
Companies with a bigger proportion of their earnings linked to sectors such as automotive and networking products will see healthier demand and remain resilient.
On the other hand, companies with a bigger proportion of their earnings linked to the consumer sector, specifically PCs, Android smartphones and TVs, will see faster share price corrections.
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Amid inflationary pressure which crimps consumer demand, the global shipment for PCs is poised for a 12.5% y-o-y decline this year to 300 million units and dip by another 2% in 2023 to 294 million units.
Nevertheless, Credit Suisse points out that despite this drop, overall PC shipments will likely still be 12- 15% higher than the pre-Covid level of 262.1 million units in 2019. Furthermore, the average selling prices of PCs are expected to remain in an upward trend in the near term, owing to the relative outperformance of the premium consumer and commercial sectors.
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Another major consumer hardware category, smartphones, is facing a similar weakening in demand. Credit Suisse says that the 2022 market for smartphones will drop 9.3% y-o-y to 1.23 billion units due to sluggish consumer buying sentiment, macro uncertainties and marginal upgrades that are not compelling enough to inspire new purchases. Even so, the trend is likely to be uneven within the overall smartphone segment. Sales for the low and mid-priced products may have slowed “abruptly” but the high-end segment is holding up well.
For example, Xiaomi Corp, the third largest smartphone maker that is better known for selling handsets at more accessible price points, saw a 29% y-o-y dip in smartphone sales for 2QFY2022. On the other hand, Credit Suisse expects demand for Apple’s newly-launched iPhone 14 and Samsung Electronics’ Galaxy Fold 4 and Flip 4 to drive a new cycle of demand for flexible OLED in 2H2022.
Despite the generally weaker demand for consumer hardware, Abrams believes there are emerging use cases, namely, the metaverse. He sees sales of augmented reality (AR) and virtual reality (VR) hardware picking up, albeit from a low base given the still nascent stage of this market.
Inevitably, analysts are forced to read geopolitical tea leaves when forecasting the outlook of the semiconductor industry. Just three months ago, the US passed its CHIPS Act to allocate US$52.7 billion ($74.1 billion) for American semiconductor research, development, manufacturing, and workforce development, including US$39 billion in manufacturing incentives.
This outright intervention of the free-market principles held dear by liberal market economists, according to the White House, will “boost American semiconductor research, development, and production, ensuring US leadership in the technology that forms the foundation of everything from automobiles to household appliances to defence systems.”
From the perspective of Credit Suisse, the CHIPS Act will pose additional challenges for the Asian semiconductor players. For some time, they are generally able to keep some US competitors at bay because of better competitiveness. But with the US subsidy, the economics of the market is distorted.
Despite the uneven playing field, Credit Suisse’s base case, according to Abrams, is that the Asia semiconductor sector will see a “moderate correction”, and not a sharp downturn of the kind of magnitude seen in 2001–2002 and 2008. “An absence of financial system stress, moderate, rather than steep supply growth in the chip industry, along with some drivers of demand in silicon content in tech should help mitigate a sharp downturn in semiconductors,” he says.
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Meanwhile, there is still “healthy growth” from cloud service providers, increasing 5G penetration in emerging markets, and rising Internet of things (IoT) content in consumer and industrial goods.
The advanced foundries, which are manufacturing cutting-edge chips on behalf of its customers, will still see high utilisation rates, says Abrams. Due to their more advanced capabilities, these foundries are expected to capture a growing share of the pie, with demand coming from products used in data centres, networking, automotive and flagship smartphones. This will offset the weak demand in lower-end smartphones and other consumer products.
In any case, the semiconductor is by now very used to this cyclical nature. The current downturn will be followed eventually by an upturn. Keon Han, head of Korea securities research at Credit Suisse predicts that the next upcycle should start in 2H2023. “The demand catalysts are already well known — autonomous driving, high power computing, big data, AI and machine learning all create data intensity, boosting tech components and system demand.”
