Since 2020, the global chip shortage has been worsening, with price rise being the defining trend of the semiconductor industry. Upstream material and equipment manufacturers face short supplies, chipmakers have increased investments from time to time to expand their product lines, and downstream semiconductor companies have made big money.
Entering 2022, especially after the second half of this year, will the chip shortage continue? Can the global semiconductor boom keep soaring?
Not long ago, there was news circulating in the semiconductor circles that TSMC had met with order cancellations from three of its big customers. At the same time, there are continuous voices for lowering chip price in the market, and speculations are rife in the industry that semiconductors will enter a downward cycle.
Overall, the supply shortage of panel drive IC, consumer-grade MCU, memory chip and other products has started to ease, heralding the beginning of a price decline. However, some power semiconductor chips, especially chips in automotive, industrial control, IoT and other fields, are still in short supply.
Looking forward to 2022, the global semiconductor industry will enter a period of more orderly growth. The tight industrial chain may ease, but high-end chip products will remain in high demand.
The global semiconductor market is expected to continue growing in 2022, but at a lower rate than in 2021. Gartner data show that the global semiconductor market size reached US $552.9 billion in 2021, a year-on-year increase of 26%. In 2022, the market will further increase by 9% to hit US $601.4 billion.
The gray columns indicate forecasts for 4Q21, while the blue columns show the updates for 1Q22 (Source: Gartner)
At SMIC’s recent earnings briefing, Co-CEO Zhao Haijun said that after accelerated consumption and inventory accumulation in the first half of the year, the supply and demand trend of the industry has shifted from comprehensive shortage to structural shortage. Currently, consumer electronics, mobile phones and other stock market segments have entered the stage of destocking, starting to make a soft landing. However, high-end IoT, electric vehicles, industry and other incremental market segments have not yet established sufficient inventory.
Arrow 4Q22 Trends Report (Source: Arrow)
From Arrow’s quarterly trends reports, it is also clear that the wind has begun to change direction in the third year of "chip shortage".
Overall, the global semiconductor industry will continue to maintain high prosperity in 2022. Vertically, tight supply still reins in the upstream of the industrial chain; horizontally, affected by demand, downstream chip products have had mix fortunes in terms of supply and price, shifting from overall shortage to structural imbalance.
Market decline on multiple tracks
Memory chips continue to cool down
Arrow’s latest industry trend report has shown stable memory chip delivery dates and prices.
Excerpt of Arrow Market Trends Report 3Q22 (Source: Arrow)
Surveys by relevant research firms also reveal that the spot price of DRAM started to fall in June 2022, down by nearly 20% in the past two months.
What factors have caused the memory chip price fall?
The main reason is that DRAM has quickly entered a falling price track as the market undergoes cyclic changes. As the world's largest memory chip producer, South Korea has recorded the biggest increase in chip inventory in more than four years. According to figures released by the South Korean statistics office on June 30, the country’s chip inventory increased drastically by 53.4% over the same period last year, while constantly on a rising trend since last October.
As smartphones, PCs and consumer applications are in weak demand, the global demand for memory chips used on electronic products is slowing down. Despite relatively good demand for servers, memory chip price will continue drop in the second half of the year due to the high inventory levels at the client end.
TrendForce points out that the global DRAM market, which is underperforming this year, will look even less optimistic next year, with market size projected to grow by 8.3% only, which falls below 10% for the first time in history. Oversupply in the DRAM market will remain grave in 2023, and price decline may well continue.
NAND Flash has a similar trend as DRAM. As demand fails to make a turnaround, NAND Flash output and process conversion have continued, while oversupply in the market may intensify in the second half of the year. It has become a consensus view of the market that consumer electronics products such as laptops, TV sets and smartphones will stay sluggish in the peak season in the second half of the year. The continuous rise of material inventory levels has become a risk for the supply chain.
Due to slow destocking by channels and unenthusiastic goods stocking by customers, the inventory problem has spread to the upstream supply side, with sellers under increasing pressure to sell goods. TrendForce estimates that the imbalance between supply and demand in the NAND Flash market is deteriorating, and the decline trend is likely to continue into the fourth quarter.
However, the bit growth of NAND Flash does make new strides every year. The market demand will grow bigger, and investment will continue.
Growth forecast for DRAM and NAND Supply and Demand in 2018-2023 (Source: TrendForce)
From the statements made by and developments at memory chip manufacturers, it can also be seen that the market is now shrouded in pessimistic prospects.
In its 3Q earnings call, Micron said: "Despite strong terminal demand, due to the shortage of non-memory components and macroeconomic concerns, we see that some enterprise OEM customers want to reduce their memory and storage inventories. Since the third quarter, we have lowered our expectations for the growth of the DRAM and NAND industry demand. We expect to face a challenging market environment in the next few quarters."
Micron is not an isolated case. Samsung has reported that memory demand is declining, especially in the PC electronics field. Looking forward to the second half of 2022, Samsung will operate under the assumption that "macro uncertainty is unlikely to disappear". The head of Samsung's memory business attributes the lower-than-expected DRAM and NAND shipments to the weak demand for personal computers and mobile devices, calling it a result of "the aggravation of inflation and other macro woes”.
The MCU price "rout"
The downward trend of the consumer market has intensified the cyclical changes of the storage market, and MCU chips are also affected.
After experiencing high growth in the previous years, consumer electronics represented by mobile phones and computers have shown a downward trend, with likely negative growth in the whole year of in 2022. Under this trend, news circulated as early as April this year that terminal chips for consumer electronics might face as big as 30% order cancellations, putting huge inventory pressure on the supply chain and terminal manufacturers that were busy preparing goods. Today, order cancellations have gradually spread to chip manufacturers from consumer electronic terminals.
However, the "irrevocable orders" often signed with upstream wafer manufacturer have only worsened MCU manufacturers’ inventory backlogs. Under heavy pressure, the price of MCU, which had risen by dozens of times in the past, is now experiencing an avalanche-like fall.
Especially in the consumer market, compared with their strong prices and short supply of the past, MCUs now see their prices almost halved. According to industry insiders, ST's STM32F103C8T66 has dropped from RMB 70 a few months ago to RMB 32 now, while STM32F103RCT6 has also fallen back to two- digit prices from its high of RMB 100 in the first quarter of the year. Infineon, Texas Instruments and other leading MCU manufacturers have all reported serious declines in their price quotations.
MCU manufacturer HOLTEK points out that its current inventory is enough for about four months, while the average inventory in the terminal market is five months. The combined 9-month inventory level is a record high, and will only return to the normal level until the first half of next year. For the fourth quarter, HOLTEK has cut its chip production at the wafer foundry by more than 10%, and its annual capacity utilization rate is expected to be 5% lower than last year.
Which other chips are in a downward cycle?
Bedsides memory and consumer MCU chips which spearhead the cooling trend, GPU, driver IC and power management chips have also declined to varying degrees.
In the GPU domain, the product prices of both NVIDIA and AMD have begun to fall. NVIDIA told its partners in the last quarter that it had to cut the production cost of its graphics cards by 8%-12% and the cut would be transmitted to downstream system integrators.
The shipment decline due to the chip shortage in the past two years will ease in the second half of the year. The supply of graphics cards in the market has become stable, while product price has dropped significantly compared with the same period in 2021. The supply of the Ge Force RTX30 graphics card series has gradually normalized. At AMD, the average monthly decline in the first quarter stood at around 13%, even the RX 6600 graphics card fell by 22%.
In the application markets in other fields, product price has generally been lowered to reduce inventory, as reflected in the case of touch display driver chips last year, low- and medium-end AP application processors of mobile phones earlier this year, and recently analog chips, consumer MCU and power management chips. The main impact is on the consumer market, which faces the pressure of order cancellations.
TrendForce said that wafer foundries have already met with order cancellations, with the first wave of order correction coming from large-size driver chips and TDDI chips. In the past, wafer foundries could count on their diversified product mixes to make flexible adjustment, even if the demand for panel driver ICs fell in the short term. This enabled them to make diversified use of their spare capacity, and effectively maintain their capacity utilization levels. However, multiple products including PMIC, CIS and some MCU and SoC chips have encountered order cancellations. Though consumer applications are mainly affected, wafer foundries can no longer withstand successive order cancellations by customers. As a result, their capacity utilization rate has begun to go down.
From the "overall chip shortage" two years ago to the "structural imbalance" today, it is clear that recent years do have witnessed some bubbles in the actual chip shortage, namely panic repeated ordering and blind chip hoarding when chips are in short supply.
Under the influence of these factors, will chip overcapacity happen after 2023?
This is also a frequently discussed topic in the industry. The risk of order cancellations for the “once sought-after” wafer foundries is increasing, and will last into 2023. Especially with the lengthening of the semiconductor delivery cycle and the explosive capacity growth of new wafer foundries, hidden concerns will not go out of sight in the next few years.
Demand for consumer applications is weak, but automotive-grade chips are in high demand
However, demand in some market segments remains strong, despite talks of “oversupply” and pessimistic sentiments about a weak consumer market.
Taking the MCU mentioned above as an example, not all MCU chips are undergoing a price “avalanche”.
This is closely related to changes in downstream demand. Compared with the sluggish demand in the consumer market, high-end application scenarios represented by automobiles and industrial control continue to enjoy rising demand in 2022. In particular, automotive MCU products are still booming. Automotive-grade MCUs are in high demand, and product prices are high. Some IDM manufacturers have even especially added production lines for automotive-grade chip manufacturing or packaging.
Why is demand for automotive MCU products not falling?
In the past decade, automotive MCUs accounted for about 40% of the gross MCU sales revenue. In 2021, automotive MCU sales surged 23%, reaching a record $7.6 billion. Structurally, more than three quarters or $5.83 billion of the sales revenue came from 32-bit MCUs, with 6-bit MCUs contributing $1.34 billion and 8-bit MCUs $441 million.
Automotive MCU Market Growth and Product & Market Structure in 2021 (Source: IC Insights)
High-end MCUs are the main product in the automotive market. Compared with the sharp decline in MCU prices in the consumer market, the demand for high-end application scenarios represented by automotive will continue to increase in 2022. The McClean report released by IC Insights points out that automotive MCUs will outgrow most other end markets this year. In the next five years, automotive MCU sales are expected to reach a CAGR of 7.7%.
Excerpt of Arrow Market Trends Report 3Q22 (Source: Arrow)
Arrow’s market trends report shows that MCU chip prices have begun to stabilize, while delivery cycles are still on an upward trend, which takes time to adjust.
It can be seen that the global MCU market already has a structural imbalance, while demand for consumer electronics market has also declined. However, some high-end MCUs are still in shortage, with automotive MCUs in greatest demand. DIGITIMES projects that automotive MCU supply will remain tight into the second half of 2023.
FPGA delivery cycles "hit the ceiling"
In addition, digital transformation is becoming a long-term demand driver in the industry, and demand for logic devices is growing.
WSTS predicts that chip demand will continue to maintain strong growth, with most major chip product categories demonstrating high year-on-year growth. Among them, logic chips are expected to increase by 20.8% and the logic chip market size will reach $200 billion in 2023, accounting for about 30% of the global semiconductor market.
As a main component of the logic chip, FPGA has a market trend is similar to that of MCUs. The head of an FPGA chip company said that they have felt the weak demand for consumer electronics, but demand in other fields is good, "With the improvement of 5G technology, the advancement of AI and the evolution of automotive automation, global demand for FPGA chips is visibly growing in the three major fields of automotive, data centers and industry."
According to Frost & Sullivan data, the global FPGA chip industry reached a size of $6.86 billion in 2021, with a year-on-year increase of 12.8%. With the deployment of new-generation communication equipment worldwide and the continuous growth of demand in AI, automatic driving technology and other emerging markets, the FPGA market is expected to continue to increase in size, likely to hit $12.58 billion in 2025.
Global FPGA Chip Market Size (Source: Frost & Sullivan)
As for the current FPGA market trends, Susquehanna Financial Group’s research data shows that the delivery time of FPGA products has reached the maximum within the 52-week limit, and may be the most constrained part of the ecosystem.
This can also be seen from Arrow's Market Trends Report, which reveals that the delivery cycle of FPGA products has reached 45-65 weeks, which is at a historical high.
Arrow Market Trends Report 3Q22 (Source: Arrow)
Some vendors say that if customers place an order to them today, they have to wait at least six months for delivery, and the delivery time of items in short supply is even longer.
Overall, the market is experiencing a certain recession, but the automotive segment is still growing. Moreover, the industrial control and automotive chip segments are not affected by the declining demand for consumer electronics.
MLCC boosts automotive applications
This trend is also fairly obvious in the MLCC field. There is also a pattern of sluggish demand for consumer electronics but strong demand for automotive chips in the MLCC market.
Currently, high inflation has led to high prices, which does not help to support demand in the peak season in the second half of the year. Among them, mobile phones, laptops, tablets, TV sets and other consumer goods can have significant impacts, causing the demand for consumer-spec MLCCs to fall and keeping market inventory rising. TrendForce predicts that the average inventory level of all product sizes will surpass 90 days and the average price of consumer-spec MLCCs may fall 3%-6% in the second half of the year.
However, demand will remain robust for automotive items, HPC (including servers), network communication equipment, industrial automation, energy storage system equipment, etc. In addition, as the demand for consumer products slows down in the second half of the year, it will drive semiconductor IDM manufacturers to gradually transfer their production capacities, which is expected to ease the IC shortage and support customers to increase orders for automotive items, industrial control and high-end MLCCs.
Comparison of Total Quarterly Shipments between TOP10 MLCC Suppliers in 2021 and 2022 (Unit: billion pieces)
In past MLCC supply and demand cycles, the reflection point of supply and demand often comes after the continuous rise of both output and price, or after the fall of both output and price. TrendForce predicts that strong demand for automotive items, servers and network communication products will drive overall MLCC shipment to reach 2,580 billion pieces in the second half of the year, an increase of 2% over the same period of last year.
In the second half of 2022, the pressure on consumer-spec MLCC quotations will remain unabated, with a continuous decline expected. However, the price picture looks completely different for automotive and industrial MLCCs. As the chip shortage eases at the customer end, these niche products are expected to drive shipments.
Excerpt of Arrow Market Trends Report 3Q22 (Source: Arrow)
Judging from the trend of passive devices, the overall MLCC market is now on course for rising prices and longer delivery time.
With a combined share of almost 80% in the automotive MLCC market, Murata and TDK have continued to expand their automotive MLCC production capacities. Besides, Samsung has also passed carmaker verifications this year. From the third quarter of this year, it will gradually increase the production capacity of its Tianjin plant. YAGEO’s Dafa plant in Kaohsiung is expected to start production line verification in the fourth quarter. It will mainly expand the production of industrial high-voltage products and large-sized automotive-use 0805 and 1210 MLCCs under 22 uF, with mass production expected to start by the end of the first quarter of 2023. The initial monthly production capacity will be around 8-10 billion pieces.
It can be seen that fighting the industrial headwind, MLCC suppliers have set their sight on the electric vehicle and energy storage fast charging markets, and continued to expand capacities in the non-consumer product application field, so as to cope with a new wave of market changes.
What role do distributors play in dynamic market adjustment?
To sum up the current situation and trends of multiple chip product categories described above, the semiconductor market has shown a pattern of “polarization”, with the demand for consumer electronics remaining weak and relevant chip product prices going down. By comparison, the demand for automotive products continues to boom, and automotive-grade chips are still in short supply.
The reason mainly lies in industrial structural changes arising from the tight chip supply earlier. All manufacturers have maintained high inventory levels, but the high inflation caused by a combination of a series of factors like the Covid-19 pandemic, trade spats and the Russia-Ukraine war has dented the purchasing power of consumers worldwide. At present, manufacturers have to lower prices to boost sales and maintain cash flows.
As demand continues to correct in the second half of the year, the market demand from automotive items, server and industrial control application scenarios can hardly make up for the full gap caused by cancelled orders for driver ICs and consumer chips. While the chip industry may not enter recession soon, its slowing growth does call for attention.
Looking forward to 2023, TrendForce reckons that after the 2.5-year chip shortage, the once wafer-starving market will be able to get redistributed resources as cooling consumer products give wafer foundries a short respite to revamp their capacity utilization. This will support them to continue to maintain a capacity utilization rate above 90%. However, some manufacturers that mainly produce consumer products see their capacity utilization rate fall below 90%. This makes it imperative for wafer foundries to diversify their product application layout and resource allocation to weather the current crisis of parts inventory adjustment caused by high inflation around the world.
How should vendors judge the industrial trend in the face of an unstable market environment and supply-demand relationships? How can they adjust their inventory in a rational and orderly manner?
Against the current background and trends, distributors as the intermediate link of the whole industrial chain have big room to leverage their role. Although they cannot directly regulate the chip market, it is nevertheless possible for distributors to play their role as a "reservoir", strengthen communication with manufacturers for updates and capacity information, and strive to obtain more supply support from them, meet customer needs and get competitive prices as much as possible.
As a leading provider of electronic products and related services in the industry, Arrow Electronics boasts rich upstream resources, guaranteed product quality and ample inventory. Under the current unstable market and supply conditions, Arrow Electronics Mall can better help customers to safely go through disturbances of the global chip supply chain with its robust material reserves and supply capacity.
In light of the current market situation and trends, customers and corporate procurement personnel can make their own assessment in combination with their actual needs and product market trends, duly adjust their procurement strategies and intensify, and effectively carry out inventory adjustment and product control in the changeable market situation.
At the same time, procurement personnel may also check the price, inventory, delivery date and other information of the corresponding products at Arrow Electronics Mall (www.arrow.cn) at any time, and use the information as a reference for knowing the market and placing orders, so as to reduce their procurement costs.
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