Semiconductors are the brains of modern electronics, enabling technologies critical to u.s. economic growth, national security, and global competitiveness.
Smarter and Better?
The growth of this market is highly correlated with the increasing consumption of consumer electronics devices across the globe. Nowadays, it is impossible to imagine life without semiconductors. Technically speaking, semiconductors are defined as crystalline solids whose electrical conductivity lies between that of electrical conductors and that of insulators. They are the brains of modern computing, mobility, and communications and they have profoundly changed the way we work, play, learn, and communicate. Semiconductors will continue to play a key role as they drive disruptive technologies such as artificial intelligence, cloud computing, Internet of Things (IoT), the global 5G roll-out, and autonomous driving.
Semiconductor Shortage
The semiconductor industry hit the headlines over the past year as supply shortages led to bottlenecks in the production of many industries depending on these little chips. The COVID-19 pandemic has disrupted worldwide supply-chains and, as a result, caused significant short-term market uncertainty. Semiconductors played a vital role during the pandemic in order to enable remote healthcare, work-at-home, and also in the automotive industry.
The pandemic induced impact of digital on lives and businesses has widened the gap between chip supply and demand across all semiconductor-enabled products and demand for semiconductors exceeded prepandemic forecasts. As a result, automotive Original Equiment Manufacturers (OEMs) and Tier 1 suppliers are competing more and more. On the other hand, semiconductor manufacturing is not suited to sudden and large fluctuations in demand, as the manufacturing process is rather complex.
Particularly, the automotive industry was affected by the shortage as the industry typically follows a “just in time” manufacturing strategy in which they optimize the inventory costs by ordering semiconductors and other components rather close to production. In other words, automotive producing companies decreased chip orders after sales fell as much as 80% in Europe, 70% in China, and 50% in the US in early 2020 and they were low on inventory when demand picked up again. The industry is depending highly on the semiconductors as electric vehicles, fuel efficiency, safety, and other connected-car features see rising demand.
Further Uncertainties
The Ukrainian invasion introduced further uncertainties to the semiconductor supply chain as well as the automotive demand. According to Reuters, some 45% to 54% of the world’s semiconductor-grade neon comes from the Ukraine. Neon plays a crucial part for lasers used to manufacture chips. China is also a producer of neon, however, Chinese prices are rising steadily. According to the U.S. International Trade Commission, prices for neon increased by 600% during Russia’s annexation of Crimea in 2014.
A Trillion Dollar Industry
In 2021, the semiconductor industry had a strong growth rate of 26.2% and is expected to grow another double digit percentage rate in 2022. The World Semiconductor Trade Statistics (WSTS) introduced updated numbers and estimates the semiconductor market to increase 13.9% in 2022. McKinsey estimates that 4 to 6 percent growth come from the computation and data-storage markets driven by 5G, AI and cloud computing. The strongest growing segment, however, is the automotive industry driven by autonomous driving and e-mobility. An analysis conducted by McKinsey shows that the industry might grow 6 to 8 percent a year up to 2030, becoming a trillion dollar industry by the end of the decade.
The Chips Act 2022
According to the Semiconductor Industry Association (SIA), rising overall demand for semiconductors as well as their increasing importance throughout the economy has drawn the attention of policymakers in Washington. Even though the US remains global leader in design as well as R&D, Asia is now producing the lion share of these chips. It is to be seen if the Biden administration and Congress will work together to incentivize US chip manufacturing.
In order to boost US competitiveness and innovation, the US government introduced a new law on August 9, 2022. The CHIPS Act invests USD 280 billion to bolster US semiconductor capacity. According to the US government statistics, 12 % of the world’s semiconductors are produced in the US. This number decreased from 37% in the 1990s.
New Restrictions on Semiconductor Exports
The US government has introduced new restrictions on China’s access to US semiconductor technology. To be more precise, the US Department of Commerce released new rules on October 7, 2022, prohibiting US companies from exporting technology, software, and equipment to China.
As a result, US companies that are more reliant on Chinese sales are likely to see greater volatility in their earnings results in the short- and medium-term. Moreover, FitchRatings writes that “researching and developing and manufacturing semiconductor chips will become more expensive and challenging for Chinese semiconductor and hardware producers”. Moreover, FitchRatings argues that these restrictions might also adversely affect revenues from equipment producers such as ASML, KLA and Lam Research.