The semiconductor industry has begun the year with growing confidence that it left its latest cyclical downturn behind in 2023, as analysts hail a “turning point” for the $600bn market.
But behind headline forecasts of a double-digit recovery in chip spending this year lies uncertainty about how broadly based that bounceback will be, as rising demand for the high-priced processors designed for artificial intelligence is offset by a more muted outlook in other parts of the tech sector.
The latest figures from the US-based Semiconductor Industry Association, which represents most global chipmakers, show that worldwide sales climbed to $48bn in November, rising on both an annual and quarterly basis for the first time in more than a year. Monthly sales peaked above $50bn during the first half of 2022.
John Neuffer, SIA chief executive, said the data was “an indication that the global chip market is continuing to gain strength” after its World Semiconductor Trade Statistics unit forecast a “vigorous upswing” in 2024, with global revenues rising 13 per cent to $588bn.
However, Malcolm Penn, founder of chip consultancy Future Horizons, said that the revenue growth figures — which were measured against a bad year for the sector — were not matched by an uptick in unit shipments.
“It’s very hard to see how you’ll get unit growth until the second half of 2024,” he said. “This is not the start of the next upturn — we have a long way to go before we start getting into the shortage part of the cycle.”
The chip industry has swung between shortages and surpluses for decades. The latest downturn began in the summer of 2022, with the industry overcoming supply problems exacerbated by the Covid-19 pandemic just as customer spending — both by consumers on PCs or smartphones and by cloud providers on new servers and switches — started to feel the pinch of inflation.
Penn said the industry “hit bottom” more quickly than in previous cycles — within less than a year. But the speed of the recovery remains in question at a time when rampant spending by cloud providers is offset by more caution from consumers and businesses.
The exception has been investment in artificial intelligence. A handful of deep-pocketed cloud and consumer internet companies have been buying up high-performance chips as generative AI took off in the wake of ChatGPT’s breakout success.
“Generally speaking, we are definitely at a turning point,” said Geoff Blaber, analyst at CCS Insight. “But we need to be realistic: if it wasn’t for that strength in high-performance compute, we wouldn’t be talking so positively about a turnaround in semiconductors.”
Taiwan Semiconductor Manufacturing Company, the world’s largest chip producer, this week reported fourth-quarter sales that were flat on the previous year, but exceeded analysts’ expectations of a decline. TSMC has benefited from its position as the go-to supplier for the most advanced chips for companies such as Apple and Nvidia, which are prepared to pay more to gain a competitive edge in products that their own customers are willing to shell out for.
Even though Apple’s iPhone sales have been under pressure, alongside the rest of the smartphone market, Nvidia’s customers have been lining up to buy its high-powered AI processors. It is only just starting to catch up with demand.
Executives at Nvidia, whose stock tripled in value during 2023, said at the Consumer Electronics Show in Las Vegas this week that they expected sustained demand to propel further sales growth throughout 2024 and into 2025.
“The market’s adoption of AI is just in the beginning stages,” said Colette Kress, Nvidia’s chief financial officer, in an interview with JPMorgan analysts at CES. “Yes, we can grow as we move into calendar 2025.”
That confidence echoed comments in mid-December by the head of Micron, the US-based memory manufacturer that is often seen as a semiconductor bellwether because it typically reports its earnings a month sooner than others in the sector. The memory market has been hit particularly hard by the sector’s latest downturn but HSBC analysts now forecast 59 per cent year-on-year growth in 2024.
“The improved supply-demand environment in the current calendar quarter gives us additional confidence in the trajectory of our business,” Sanjay Mehrotra, Micron chief executive, said last month, pointing to “a strong inflection in industry pricing this calendar quarter”.
“We expect our pricing to continue to strengthen through the course of calendar 2024,” he added.
Researchers at Taiwanese consultancy TrendForce predict that average selling prices for Dram memory chips used in smartphones and other devices will rise by between 18 per cent and 23 per cent this year. They increased between 13 per cent and 18 per cent in the fourth quarter.
During a year-long supply glut between 2022 and 2023, Korean memory chipmakers SK Hynix and Samsung both slashed production as they suffered multibillion-dollar losses.
But now Kwak Noh-Jung, chief executive of SK Hynix, which has pioneered the development of so-called high-bandwidth memory chips used in AI servers, is striking a more optimistic note. He said the South Korean memory chipmaker was aiming to double its market capitalisation over the next three years, as it seeks to exploit demand for components in the systems needed to train AI systems.
Kwak told reporters at the CES that “we are considering a change in our production cut strategy in the first quarter” due to “signs of improvement in the Dram market”.
Samsung, which produces both logic and memory chips, this month reported its smallest year-on-year decline in profits in five quarters.
Share prices of some of the world’s biggest chipmakers, including Intel, AMD and Nvidia, generated big gains during 2023 as investors anticipated the turn in the cycle.
“We model the semiconductor cycle accelerating through 2024 to peak in [the first half of] 2025, resulting in [roughly] 20 per cent growth this year and a mid-teens growth in 2025,” said analysts at Jefferies in a recent note to clients.
But at a time when unit volumes are languishing, a rise in average selling prices has been the decisive factor in the return to revenue growth, said Penn of Future Horizons. “What is unclear at the moment is why that ASP growth is so strong,” he said. While Nvidia can charge tens of thousands of dollars for its AI systems, they sell in relatively small volumes.
“AI is not a smartphone and that’s the problem,” he said. “It’s not big numbers in the overall scheme of things.”