While the semiconductor industry will post single-digit growth in 2020, buying conditions will favor semiconductor purchasers as there will be ample capacity to meet demand – By James Carbone
Buyers can expect plentiful supply, normal lead times and price declines for most integrated circuits and discretes in 2020, despite stronger chip demand and lower inventory levels compared to 2019.
While many semiconductor manufacturers have cut back on capital expenditures, there’s still ample capacity for manufacturing expansion that occurred in 2018. The capacity that was added resulted in semiconductor inventory levels growing last year as shortages of some memory ICs and discretes were mostly eliminated.
Inventory levels fell back half in the second half of 2019, but there still is some excess inventory that has yet to be worked off. As a result, unless there is a huge spike of demand that continues for months, there should be more than enough supply to meet demand, especially in the first half of 2020, according to analysts. Prices for many chips should decline and lead times should not be a problem in 2020. Chip buyers can expect price erosion for memory ICs, analog chips, sensors, optoelectronics and discretes in 2020.
High inventory levels, declining demand and lower prices resulted in worldwide semiconductor revenue falling 12.8 per cent to $409 billion in 2019, according to World Semiconductor Trade Statistics (WSTS).
Much of the semiconductor revenue decline was due to falling sales for memory ICs and by a steep drop of chip prices in 2019, according to researcher IC Insights. For instance, the average DRAM price fell 44 per cent in 2019, resulting in a 37 per cent decline of DRAM revenue. By comparison, the average integrated circuit price fell 10 per cent, the researcher said.
The steep decline in semiconductor revenue in 2019 was due to a kind of perfect storm of events. First, demand for end products was weak, said Len Jelinek, director and chief analyst for researcher IHS Markit. “Handsets were saturated, everyone has a PC, car sales declined” and data centers eased back on purchases of servers, he said.
Weak end equipment demand came after two years of increased capital spending and capacity expansion by chipmakers. Semiconductor fabs were optimised “and running at high volumes as end market demand slowed down,” he said. “Inventories increased to high levels not only for the chip guys but through the channel,” he said. As a result, chipmakers reduced prices hoping to stimulate demand. “Well, it did not work because there were only so many handsets and so many PCs and so many servers” to be built, said Jelinek.
Demand will bounce back
The good news for semiconductor companies is sales growth will return in 2020 and revenue should increase almost 6 per cent from $409 billion in 2019 to $433 billion in 2020, WSTS said. Semiconductor revenue will rise 6.3 per cent in 2021.
While semiconductor demand and sales revenue will increase, it probably won’t happen until the second half of the year, according to Jim Feldhan, president of Semico Research. He said declining chip industry sales will “bottom out in the March/April time frame and then things will improve, but it won’t be a V-shaped recovery to start. It will be slow because we think the overall economy is going to be sluggish in 2020,” he said. Feldhan forecasts about 3 per cent revenue growth for semiconductors and 8.7 per cent growth in unit shipments in 2020.
While all categories of integrated circuits declined in 2019, the trend will reverse in 2020. Analog chip sales declined 7.9 per cent in 2019, but will rise 5.3 per cent 2020, said WSTS. Memory IC revenue fell 33 per cent in 2019, but sales will increase 4.1 per cent in 2020. Logic sales dropped 4.3 per cent but will rise 6.5 per cent this year. Discrete semiconductors suffered just a .6 per cent decline in 2018 and will increase 3.8 per cent in 2020, according to WSTS.
The only two semiconductor categories that posted sales growth in 2019 and will rise again in 2020 were sensors and optoelectronics. Optoelectronics sales grew 7.9 per cent in 2019 and will post a 12.5 per cent increase in 2020. Sensor sales increased 2 per cent 2019 and revenue will rise 5.4 per cent in 2020, according to WSTS.
Analysts say sales growth for chipmakers will increase in 2020 because inventory levels will be lower than 2019, and demand will increase from key customers segments.
“The key drivers for the semiconductor industry will be 5G, servers, and automotive,” said Jelinek, “The largest and most significant driver especially in the short-term will be the transition to 5G” because it will be an enabling technology, he said. “The smartphone will be the immediate beneficiary of 5G technology and will receive the most attention, but as 5G networks become deployed they will serve as enabling platforms for future growth across multiple market segments,” he said.
Wait until 2021
Some industry analysts say 5G will have a positive impact on the semiconductor industry, but 5G won’t affect the industry too much in 2020. “It certainly will give sensors and discretes a little boost next year, but we’re still early in the rollout of systems that can take advantage of the higher speeds and near instant transmissions of data through the network,” said Rob Lineback, senior market analyst for IC Insights. He said 4G LTE will continue to be the dominant cellular generation for several more years.
Feldhan said that 5G infrastructure is being built “but it has not gotten the momentum to have a major impact in the market this year.” There’s a lot of 5G development and 5G networks are being built and there are a few 5G phones on the market today and we will see more coming out in 2020.
Feldhan noted that there are some 5G networks in large metropolitan areas. “It is a chicken or an egg thing. Service providers are starting to build 5G networks, but they don’t want to do a whole buildout when there aren’t really that many phones out there,” he said. The real impact of 5G will start in 2021 and continue through 2023.
Automotive will continue to be a driver for semiconductors in 2020 and beyond because of the proliferation of infotainment, advanced driver assistance systems (ADAS) and the development of the autonomous vehicle. However, automotive only represents about 9 per cent of all semiconductor sales. The segment will grow as a percentage of sales, but it will remain relatively small compared to other segments.
Semiconductor sales to automotive totaled about $42 billion in 2019, according to IHS Markit. However, computer and storage semiconductor sales totaled $145 billion, while wireless communication accounted for $119 billion of chip sales.
Jelinek notes automotive uses a lot of mature semiconductors such as MOSFETs, and “those cost about $.25-$.30, so you are not talking about $75-$100 chips.” However, as more vehicles are equipped with infotainment systems, more advanced electronics and displays will be used so. “There is tremendous opportunity for growth,” for semiconductors sold to the auto industry, said Jelinek. “But is it enough to swing the dial in the total semiconductor industry,” asked Jelinek. “No, it isn’t,” he said.
However, it will be a growing segment for semiconductor companies that focus on the automotive industry and for companies that are supplying ICs for infotainment, and ADAS systems.
Increased demand from 5G and automotive applications and other customer segments will result in less price erosion in 2020. DRAM tags will fall about 8 per cent, while NAND flash will increase 2 per cent. Prices for optoelectronics will decline 2.7 per cent, sensor tags will drop 3.9 per cent and the average price for discretes will decline 3.5 per cent, according to IC Insights.