The most pessimistic analyst: The chip market will decline by 20% this year

Analyst Malcolm Penn slightly tempered his outlook for the global chip market in 2023, softening his view on the most likely contraction to 20%. He had previously forecast a 22% drop. However, Payne remains the most pessimistic forecaster, well below most other forecasters. Gartner recently predicted that the market will decline by 11.1% by 2023.

On the call, Penn, CEO and founder of Future Horizons, said this would not be possible without immediate sequential growth in the second quarter of 2023 and normal growth for the remainder of the year. "You need growth in the second quarter and even stronger growth in the third quarter. There's just no sign of that happening," Payne said.

"The good news is that unit shipments are below the long-term trend line. This means that inventory is being burned. Shipments in March were 6.2 billion units per week, compared with the previous peak of 8.2 billion units per week. If any So, capacity is increased, so the fabs are producing at 75% or less," Penn said.

This also provides another explanation for why the chip sector cannot suddenly start showing quarter-on-quarter and year-over-year growth. "We still have two quarters of inventory burn, so I don't see a turnaround until the fourth quarter of 2023. All growth trends right now are still negative," Penn said.

Back in May 2022 - and confirmed in January 2023 - Penn made bull, average and bear forecasts for chip market growth in 2023, at -17%, -22% and -26% respectively. .

"The first quarter [of 2023] is closer to our bull case scenario. The -26% worst-case bear case scenario is now less likely to happen. But essentially nothing has changed."

Penn now predicts that the global chip market will contract by 18% to 22% in 2023, with the most likely outcome being a 20% decline.

Regarding 2024, Payne said it's too early to tell exactly where in the upturn cycle this year will land, so it's too early to chart growth numbers.

According to the latest forecast from Gartner, Inc., global semiconductor revenue is expected to decline by 11.2% in 2023. By 2022, the total market will reach US$599.6 billion, a marginal increase of 0.2% from 2021.

The short-term outlook for the semiconductor market has further deteriorated. Total global semiconductor revenue is expected to reach US$532 billion in 2023 (see Table 1).

"As economic headwinds persist, weak end-market electronics demand is spreading from consumers to businesses, creating an uncertain investment environment. In addition, an oversupply of chips, leading to increased inventory and falling chip prices, is accelerating the semiconductor market's decline this year," said Richard Gordon, practice vice president at Gartner.

The memory industry is dealing with overcapacity and excess inventory, which will continue to put significant pressure on average selling prices (ASPs) in 2023. The memory market is expected to total $92.3 billion, declining 35.5% by 2023. However, it is expected to rebound with 70% growth in 2024.

Although bit production by DRAM suppliers is flat, the DRAM market will be severely oversupplied for much of 2023 due to weak end device demand and high inventory levels. Gartner analysts expect DRAM revenue to fall 39.4% to $47.6 billion in 2023. The market will turn to undersupply in 2024, and DRAM revenue will grow by 86.8% as prices rebound.

Over the next six months, Gartner expects NAND market dynamics to be similar to those of the DRAM market. Weak demand and large supplier inventories will create oversupply, causing prices to fall sharply. As a result, NAND revenue is expected to decline 32.9% to $38.9 billion in 2023. By 2024, NAND revenue is expected to grow 60.7% due to severe supply shortages.

"The semiconductor industry will face many long-term challenges over the next decade," said Gordon. "The high-volume, high-value content market drive of the past few decades is coming to an end, especially in the PC, tablet and smartphone markets, which have been devoid of technological innovation." . "

Additionally, COVID-19 and US-China trade tensions have accelerated deglobalization trends and the rise of techno-nationalism. "Semiconductors today are viewed as a national security issue," Gordon said. "Governments around the world are scrambling to build self-sufficiency in semiconductor and electronics supply chains. This is leading to incentives for offshoring initiatives around the world."

The semiconductor market for PCs, tablets and smartphones is stagnant. By 2023, the combined market will account for 31% of semiconductor revenue, totaling $167.6 billion. “These high-volume markets have become saturated and become alternative markets lacking compelling technology innovation,” Gordon said.

At the same time, the automotive and industrial, military/civilian aerospace semiconductor markets will all see growth. The automotive semiconductor market is expected to grow 13.8% to reach $76.9 billion in 2023.

In the future, there will be more but smaller end markets. The end market will be more fragmented, and growth will come from many different fields such as automotive, industrial, Internet of Things, and military/aerospace.

“End market demand is less affected by consumer discretionary spending and more affected by corporate capital expenditures. The supply chain will be more complex, involving more intermediaries and different market channels, in order to meet different end markets Demand, will require different types of capabilities," Gordon said.

After TSMC lowered its full-year semiconductor business outlook, UMC co-general manager Wang Shi also lowered the full-year semiconductor industry outlook proposed earlier yesterday. It is estimated that the overall semiconductor business (excluding memory) will fall by low single digits from the original estimate ( 1~3%), which was revised down to a mid-single digit recession (4~6%); the foundry industry's annual decline was in the mid-single digits (4~6%), which was also revised down to a high single-digit recession (7 ~9%).

Wang Shi emphasized that he originally expected the economy to recover in the second half of the year, but so far, there are no signs of strong recovery, and the depletion of industrial inventories is slower than expected. Wang Shi admitted that the industry recovery is slower than originally expected, and the overall demand outlook for this quarter is still sluggish. It is expected that customers will continue to make inventory adjustments. "This year is a challenging year."

Wang Shi admitted that the industry recovery is slower than originally expected. Applications including consumer electronics, computers, communications and automobiles are expected to be stable this quarter, but there are no signs of strong recovery in demand in the next few months. Fortunately, automotive Orders for household and industrial applications remained high.

The market is paying attention to the quotation trend of mature wafer foundry processes and UMC's subsequent pricing strategy. Wang Shi emphasized that when facing challenges, UMC not only focuses on price, but also provides customer technology and production capacity support. The average unit price of products this quarter will remain stable.

Looking at the whole year, Wang Shi admitted that this year is a challenging year. As the market recovery is slower than expected, UMC has lowered its revenue forecast for the global semiconductor and wafer foundry industry this year. It is expected that the revenue of the semiconductor industry will decrease by 4% year-on-year. 6%, a decrease higher than the original estimate of 1% to 3%; wafer foundry industry revenue will decrease by 7% to 9% annually, a decrease larger than the original estimate of 4% to 6%.

Wang Shi emphasized that even though demand in major end markets is weak, UMC's automotive and industrial products have continued to grow. In particular, the automotive business contributed 17% to revenue in the first quarter. Driven by automotive electronics and autonomous driving, UMC has a positive outlook on automotive products. IC content continues to increase, and automotive products will be an important source of revenue and growth driver for the company in the future. UMC will simultaneously strengthen long-term cooperation with key automotive customers.

Even if the market development is not as expected, UMC still assesses that there is a chance that its operations will bottom out in the first quarter. In the second quarter, consumption, communication and automotive demand are expected to be stable, and driven by OLED driver IC, digital TV and WiFi, 22nm and The situation of the 28nm process should improve in the next few months. Although there are still no signs of strong recovery, we are confident that the capacity utilization rate is expected to increase quarter by quarter, driven by the above-mentioned applications, and strive to reach around 80%.

Looking to the future, UMC emphasized that it will continue to focus on differentiated solutions across logic and special process platforms, such as eHV, RFSOI, and BCD, to enhance future business growth and expand its influence in the semiconductor industry.

On the other hand, with the opening of new production capacity at Nanke's Fab 12A plant, UMC's wafer production capacity in the second quarter is estimated to reach 2.63 million 8-inch equivalent wafers, a quarterly increase of 4.12% and an annual increase of 3.88%.

When it comes to whether geopolitics affects customers' assessment of the stability of the supply chain, UMC explained that the company has production bases in mainland China, Taiwan, Singapore and Japan, and has the advantage of diversified and dispersed production capacity. It also has more choices when working with customers.

After TSMC recently released news that its prospects are not as good as expected, Morgan Stanley Securities pointed out in its latest report that the downside risks of the automotive semiconductor industry have increased significantly, especially the weak demand for automotive MOSFETs and automotive power supplies. Management IC factories have lost their pricing power and are bearish on related Taiwanese factories such as Silicon Power and Hechip, giving "underperform" and "neutral" ratings respectively.

The outlook for the automotive industry is turbulent, and related technology companies have recently expressed expectations of weakening demand. For example, in the production of automotive microcontrollers (MCUs), TSMC, which mainly uses 65-nanometer processes, recently admitted in a conference that although the demand for automotive semiconductors is currently stable, it will weaken in the second half of the year.

Power Semiconductor also said that demand for automotive MOSFETs and insulated gate bipolar transistors (IGBTs) is declining. Hejing, which contributes 56% of its revenue from automotive-related products (mainly MOSFETs), said that demand from global integrated component manufacturer (IDM) customers in the second half of this year will be the same as that in the first half, indicating that the economic recovery in the second half of the year will be relatively limited.

After conducting industry interviews, Morgan Stanley pointed out that the supply of automotive MOSFETs is no longer tight, and what is worse is that demand has become weak. Hejing also believes that some businesses are facing headwinds and recovery will be limited in the second half of the year; on the other hand, automotive power management IC and analog IC companies continue to face downward pressure on prices.

Fortunately, not all automotive sub-industry prospects are pessimistic. Morgan Stanley learned from the supply chain that power solution suppliers believe that car manufacturers are still signing memorandums of cooperation (MOUs) with IGBT suppliers for 2024, because the demand for IGBTs in inverters remains stable, and some customers even still require 2024 The annual IGBT supply increases by 30% to 50% compared with the current level.

In addition to the high demand for automotive IGBTs, automotive MCUs are also in tight supply and demand. Currently, automotive MCUs have not yet seen a decline in usage and price.

"In our January 2023 industry update webinar, we reconfirmed our May 2022 forecast of a double-digit decline of 22% in 2023, despite the fact that most other industry experts again said Just a small single-digit decline," Future Horizons CEO Malcolm Penn said.

"This puts us in a real dilemma," he continued.

“This marks our third consecutive run against the industry consensus,” Penn continued. “We’re not doing this to buck the trend, and we simply don’t see how we’re going to achieve the low-single-digit forecast. To do that The bottom line is that the market needs to have bottomed out, and there is no evidence (either anecdotal or factual) to substantiate this view. Nearly two months into 2023, the first quarter is almost a foregone conclusion, but not a single person, company or organization is predicting it. The worst recession is over."

“In fact, the boom of 2021-22 and the bust of 2023 are just a repeat of the infamous chip industry cycle—the seventeenth since the first cyclical recession in 1961—and are only consistent with the previous cycle. The gap is longer, Penn added.

"Why are we so confident that the correction in 2023 will be strong when no one else does? Because the key industry fundamentals, namely unit demand, manufacturing capacity and IC ASP, are all in terrible shape," Penn said.

"First, inventory levels across the industry are at historically high levels, driven by product shortages and extended delivery lead times, with unit demand well above long-term averages. This is similar to forward shipping, as lead times shorten. We already purchased a lot of today’s needs yesterday,” Penn said.

"Secondly, as demand falls, average selling prices start to plummet as suppliers cut prices to stimulate new demand."

“Third, it takes a long time to add new production, but eventually it catches up, and then lead times start to fall, triggering the liquidation of now-excess inventory. Meanwhile, new capacity construction continues to gain when you don’t need it It will take at least four quarters to rein in capital spending when it is no longer needed."

"So we now have lower unit demand, lower average selling prices across the board, and overcapacity that has not yet peaked. It will take at least two to three quarters for this imbalance to stabilize, which means strong headwinds throughout 2023," Penn It concluded, "Moreover, the global economic outlook remains shrouded in fog and uncertainty, and there is no way one can reasonably expect a single-digit chip market downturn."

“That said, there is no need to panic or despair; this industry has been through this several times before, and while these situations are always challenging and harsh, they are very normal and natural, and ironically, this is what really makes the market "When share is growing," Penn said, "it's just a typical semiconductor market downturn, going down a well-worn path."

In Penn’s view, now is the time to roll up our sleeves and do whatever is necessary to keep the company viable in the short term without compromising the long term; any actions taken now need to be clearly and firmly in mind of the inevitable upturn in 2024. Now is the time to prepare for the inevitable 17th industry upturn, which is just around the corner.