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State of semiconductor industry


  • Overview of the semiconductor industry
  • Current and future growth prospects of the semiconductor industry

 

Semiconductors, often referred to as integrated circuits (ICs) or microchips are basic building blocks that are used to create an increasing variety of electronic devices. During the past 50 years, developments in semiconductor technology have made electronic devices smaller, faster, cheaper, reliable and more advanced to handle huge amount of data with higher degree of complexity. Semiconductors, typically made from silicon or germanium, have become essential technology enablers that power cutting-edge digital products, without which the world cannot be imagined as it is today.

Semiconductor companies generally organize their business activities around three main production processes: upstream, mid-stream and downstream. Companies that focus only on ICs design are commonly referred to as “fabless”, while companies that focus only on manufacturing are called “foundries”. Companies that are involved into both are called Integrated Device Manufacturers, or “IDMs”.

The manufacturing process of semiconductors is relatively complex that requires sophisticated engineering and expertise. In general, the semiconductor manufacturing process consists of IC design, wafer fabrication, wafer probe, packaging and final test.

Overview of the semiconductor industry

The semiconductor industry is characterized by strong long-term growth, with periodic cyclical downturns. According to SIA (Semiconductor Industry Association), worldwide sale of semiconductors grew to ~ US$ 468.8 bn in 2018 from merely ~US$ 51 bn in 1990. This growth was largely driven by extensive demand for smartphones and the proliferation of applications including IOT (Internet of Things) and cloud computing. This industry is providing more advanced products backed by persistent improvements and innovation in design, technologies and processes with lower costs which has resulted in significant performance enhancements and price benefits to manufacturers of electronic products.

Asia Pacific region is the world’s biggest market for semiconductor consumption. China, Taiwan, Japan and South Korea are countries where some of the world’s most important semiconductor companies are located. East Asia’s burgeoning economy, growth of smartphone and mobile communication and rising cloud computing has placed these countries on hotspot for semiconductor industry. China commands more than 40% of overall market demand and is the world’s largest buyer and importer of chips due to its massive manufacturing power, especially in consumer electronics. Semiconductor industry has been put as a strategic industry in ‘Made in China 2025’ plan and the country is targeting to surpass other Asian countries (especially Taiwan which is leader in total production value) in terms of production output as well, in line with its aspiration to become a self-sufficient semiconductor industry. 

Notwithstanding the positives, the industry growth is expected to be tested with the overall weakening in outlook of major economies across the world. The IMF has revised downward its forecast of global economic growth for 2019 and the following year acknowledging the risks from various factors such as slower than expected Chinese economy growth, trade tensions between the U.S. and China and uncertainty over the UK Brexit issue amongst others. The U.S. holds leadership position in the semiconductor industry controlling about half of global market share in terms of revenue generation. China, on the other side, is a major market for the industry in terms of revenue contribution and accounted for ~41% of the total global demand in 2018. Ongoing dispute between the U.S. and China is expected to have long-term impact on semiconductor supply and demand scenario. Overall these combined issues are anticipated to accelerate uncertainty and result in somewhat flattened growth trajectory for the semiconductor sector in the near term.

The industry which is majorly made up with seven type of components (memory, analog, micro-component, logic, optoelectronic, sensor and discrete (O-S-D)) is also seen taking a hit due to fears of overcapacity particularly in the memory and allied manufacturing segment. Memory products generates major share of revenue followed by microcomponent and logic for the industry. Overcapacity (Samsung’s massive expansion in 2017-2018 could be one of the reasons) and the increase in inventory could lead to excess supply in the market. As a result, it is expected that price of memory and flash memory chips will greatly reduce in 2019 leading to a decrease in sale of memory products and hence, adversely affect the entire semiconductor market in 2019 before marginally picking up again in 2020.

Positively, emerging segments such as AI (Artificial Intelligence) in products, 5G networks, growth in automotive and industrial electronics is creating abundant opportunities for semiconductor companies and will be key driving factors in coming years. As per PwC’s report, data processing electronics including storage and cloud computing is seen to be the major revenue generating segment in 2022 with ~34% share while communication electronics which include wired and wireless electronics is expected to generate ~29% share. Though demand for smartphones is reaching saturation, electronic products such as head mounted display, smart watches, ADAS (advanced driver-assistance systems), EV/HEV (electric vehicle/ hybrid electric vehicle) will likely be the most revenue deriving applications for semiconductor industry where IC revenue is anticipated to grow at more than 20% CAGR (2017-2022). Hence, automotive electronics and industrial electronics are expected to be the fastest growing markets (at more than 10% CAGR between 2017-2022 year), while consumer electronics, data processing electronics and communication electronics markets are expected to grow steadily.

The semiconductor industry has experienced robust growth in past, fuelled by demand for PC, CPUs, network processors and now smartphones, but the road ahead might not be similar. However, disruptive technologies such as artificial intelligence driven electronics and programs such as autonomous vehicles, and the IoT will likely be the catalyst for another round of growth cycle for this sector and provide abundant opportunities. The industry is seen benefiting from ongoing development and innovation in the area of communication, connectivity, cloud computing and automotive industry among others.

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