After two quarters have passed this year, the trend of the global semiconductor industry has seen some changes. The industry, as reported in the media, shows a different trajectory from the past. Previously, there were shortages of chips, increase of cost, and prolonged inventory cycles. In the semiconductor equipment market, there were also prolonged delivery cycles, as well as increased prices for foundry orders and the need to pay deposits. However, things appear to see a different light in recent media coverage. For example, a report by American investment bank Morgan Stanley pointed out that some terminal markets that were initially expected to rebound in the second half of 2022, such as cloud semiconductors and desktop computers, have instead shown weakening signs. Morgan Stanley believes that all wafer foundries, except TSMC, will see lower capacity utilization in the second half of the year. The clients of these foundries may even breach long-term agreements and cut the orders, or excess chip inventory may be written off.
When it comes to the wafer foundry industry, there is a view that the structure of the semiconductor industry has changed significantly. Although the consumer electronics market has been weak recently, the supply of automotive, internet and telecommunication, as well as industrial control chips is still in short supply, offsetting some of the declines in orders.
Memory storage, in general, is more sensitive to market reactions. According to research by TrendForce, the NAND Flash bit shipments and average selling price in the first quarter of 2022 dropped by 0.5% and 2.3% respectively, reducing the overall industry revenue in the first quarter. 3.0% to USD 17.92 billion. Industry insiders stated that the market price of some products of Texas Instruments (TI) in March was still around RMB 100, but now they can be bought for with merely approximately RMB 20. Other TI products have also declined to varying degrees, indicating that market price is slowing down. In China's consumer electronics market, domestic mobile phones did not sell well this year. In the first quarter, the sales of several major China-made mobile phones dropped by 170 million units, and the market is expected to cut another 100 million units in the future. It has been reported that Qualcomm has cut orders by about 15%, MediaTek by about 35%, and related industry chain manufacturers such as Sony and Broadcom have also made some adjustments.
Nomura Securities pointed out recently that semiconductors will have no peak season effect in the second half of the year, and that it will enter a period of order profit reduction. Nomura continues to view the semiconductor industry conservatively and believes that the upward cycle of the semiconductor industry will end in the first half of this year. The profit performance and stock price trend of semiconductor stocks in 2022 will be similar to the downward trend in 2008, 2011, and 2015.
Concerning these various voices from the media and institutions, it should be noted that at this stage, there are diverse opinions. Some are optimistic, and some are not, and this has caused the industry to be aware that the situation differs from the past. Furthermore, to attract people's attention, certain media are quite keen to report those voices that are different from the mainstream views.
Information tracking on the semiconductor industry shows that there is in fact quite a lot of data about the continuous growth of the industry recently. For example, Intel CEO Pat Gelsinger said on May 25 that the chip shortage problem is now beginning to improve, but it has only eased by half, and the industry’s situation may last for 18 months. Malcolm Penn, CEO of market research firm Future Horizons, on the other hand, stated that while 2022 won't be a disastrous year, 2023 could beckon a worse outcome. He believes that this year's chip growth forecast of 4%, 6%, or even 10% is possible, although a slowdown is inevitable, yet its magnitude would depend on timing. Compared with the fourth quarter (Q4) of 2021, Gartner raised its forecast for the global semiconductor industry in the first quarter (Q1) of 2022, from a growth of 9.5% to 13.6%.
Industry insiders are of the opinion that the aforementioned media voices and fluctuations in the capital market may be normal market reactions, though it is still early to be certain. The semiconductor industry always achieves a dynamic balance driven by the contradiction between supply and demand. In any case, the industry is still likely to see positive growth this year, at around 10%.
Another question that cannot be ignored is, how will the end of globalization affect the semiconductor industry? Objectively speaking, this is a difficult question to answer, at least for China, as the argument of “the end of globalization” may not be all that apt in describing the country's current development trend.
Concerning the development of China's semiconductor industry, it is undeniable that the country now enjoys lesser dividends of globalization, while the impact of geopolitics is increasingly being felt. There are usually three models that dominate the development of the semiconductor industry, namely R&D, mergers, and joint ventures. At this stage, China basically only focuses on R&D. Though it has not abandoned merger and joint venture models, under the gradually deteriorating geopolitical environment, these two models are becoming inefficient. This means that even if China is on the same starting line as its competitors today, due to the limited supply of foreign technologies and key equipment, its development will consume more time and monetary resources.
In China’s semiconductor industry, a minority of people continue to hold that China itself has the largest market in the world, and even if it loses markets like the United States and Europe, it still has East Asia, South America, Africa, and other regions.
Liu Yadong, the former chief-editor of Science and Technology Daily, mentioned that China was successful in its nuclear and space projects, because all resources could be mobilized to overcome difficulties, regardless of the cost. However, chips are market-oriented commodities. For example, if the price of a chip manufactured by others is sold at the price of USD 10, the market would not accept chips manufactured by China sold at USD 100, or even at USD 20. Therefore, mobilizing the entire country’s resources will still be ineffective in this regard.
Regarding the suppression imposed by the U.S. on China in the field of the technological industry, China needs to be fully prepared for the challenges ahead. It should also realize that the semiconductor industry has its particularities, which cannot be solved with money alone. From the perspective of the semiconductor industry chain, without the support of globalization, a complete localization will not be successful. China then should utilize both globalization and localization, while being aware of the attempt of the United States to widen the gap between its semiconductor industry with the international advanced standard.
Under the current situation, China needs to be prepared for the worst. It cannot be ruled out that at a certain stage in the future, the U.S. will decouple with China, which in turn will hinder the large-scale import model familiar to the Chinese semiconductor industry. In this case, China can only rely on promoting localization to break through the blockade. As far as the long-term development of the semiconductor industry is concerned, the realistic way out for China is that, while striving to maintain open cooperation, it must overcome difficulties and adapt high-quality localization to open-up gaps in the Western embargo barriers, at least with certain mutual restraining ability.
Globalization is a product of economic laws and should not be abused as a political tool by a few countries. From a historical point of view, the difficulties at this stage may be temporary. Solutions to problems can always be found. Yet tactically, China must have adequate contingency plans, while possessing realistic and effective response strategies, so that its semiconductor industry may still have hope for tomorrow.
Final analysis conclusion:
The signs of a slowdown in the end product market of the global semiconductor market this year have caused the industry to adjust its expectations. However, it remains to be seen whether this adjustment is a shift in the industry cycle. For China's semiconductor industry, the more important thing is not to adapt to the industry's fluctuations, but to find a sustainable development path in the new geopolitical environment.
