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Published: June 25, 2023

The Semiconductor Industry’s Biggest Challenges

After two years of record-breaking growth, 2023 is set to be a more challenging year for the semiconductor industry.

The ups and downs of the semiconductor industry have only recently become of widespread concern. The challenges faced by chip manufacturers and their supply chain were unlikely to cause too much of a stir prior to the COVID-19 pandemic. But when a shortage of the components started to impact car and smartphone production, and the availability of products including home appliances, more people started to take notice.

Now, as economies around the world continue their recovery from the pandemic the semiconductor industry must find its way back to normality as well. Here are five key factors that will help to determine how long and winding that road is.

1. Declining revenue

Firms have just recorded their best year ever, reaching $595.7 billion in revenue in 2022. But the numbers only tell part of the story. The market declined in all four quarters, according to Omdia’s latest research. In the final three months, revenue dropped 9% to $132.4 billion – just 82% of the record quarterly revenue of $161.1 billion a year earlier. 

For many, the decline doesn’t come as a surprise. The pandemic accelerated the demand for electronics products but that also caused supply problems. Now, increasing instability around the world and rising political tensions are adding to the uncertainty. This perfect storm means people have stopped buying and companies are reigning in their budgets due to concerns about what comes next. 

The challenges of operating in this post-pandemic environment are expected to continue in 2023. Semiconductor revenue is forecast to fall 8% year-on-year.

2. Reduced capital expenditure

Semiconductor firms’ capital expenditure (CAPEX) is also expected to reduce in line with the drop in revenue and increase in uncertainty. In 2022, CAPEX was at its highest level since we began tracking the data two decades ago. Companies had invested in new facilities and equipment to meet the demand for products. CAPEX as a proportion of revenue was at 24.9%.

The average rate of expenditure in the semiconductor market has been 19.4% for most of the past 20 years. The exception was during the pandemic, and before that, during the financial crisis that began in 2008. Then, CAPEX dropped sharply to an average of 16.7% but increased when rapid developments in technology exposed the underinvestment. 

The close relationship between revenue and CAPEX means that as revenue declines in 2023 a lower percentage of it will be spent on increasing capacity. We expect the average spend to reduce to 20% or below.

3. A drop in the price of components

In the second half of 2022, the price of key components including processors and memories dropped sharply. For example, dynamic random-access memory (DRAM) has declined by 40% in just the past four months. We expect price erosion to affect other semiconductor product categories in 2023. However, firms should note this is a cyclical industry, which means the market will bounce back. 

4. Companies trying to stimulate demand

To counteract the decline in customers’ spending, companies may take matters into their own hands to stimulate demand for their products. Earlier this year, electric vehicle (EV) manufacturer Tesla began cutting the prices of its cars – some by up to 20%. Ford has also reduced the cost of its all-electric Mustang Mach-E vehicles in the United States. Cars, and EVs in particular, are an increasingly important segment for semiconductor firms because of the electrification and electronification of vehicles.

We’re looking closely at what may happen in other segments this year. Segments that could significantly and positively impact the semiconductor market include smartphones. They’ve been the largest driver of demand in recent years because of the number of components required for each device. If the market recovered significantly it could be a game changer for semiconductor firms. 

We’re also watching the data center and PC markets for improvements.

5. Countries boosting their economies with the help of incentives

The most significant driver of demand will be any action taken by countries to speed-up their recovery from the pandemic. Late last year, China began reopening to the world after one of the world’s harshest lockdowns and is now rebuilding its economy.

Governments around the world are also giving their semiconductor industries a boost, although for different reasons. The Biden-Harris Administration is providing more than $50 billion of support for semiconductor research and development, manufacturing and workforce development. The European Union is taking similar steps through its European Chips Act, and Taiwan and Japan have introduced their own support packages.

At the heart of the computing, mobility and communications revolution is the semiconductor, a technology that has changed how we work, play, learn, communicate and so much more. Semiconductors remain critical in advancing breakthrough technologies, including artificial intelligence, cloud computing, autonomous driving, IoT and global 5G deployment.

Value Driven Solutions has been helping semiconductor companies capitalize on these trends, with clients ranging from the world's largest foundries to leading integrated design manufacturers. Our semiconductor consulting expertise can help you optimize your strategy and performance, so you make the right moves to win in these dynamic times.

We are the go-to consulting firms of the global semiconductor industry. We have worked with 5 of the world’s Top 10 tech companies and 6 of the world’s Top 10 semiconductor companies, on everything from enterprise strategy to M&A to product development and go-to-market strategy.

Our global team has deep expertise in the most important issues facing semiconductor companies today, including:

  • Leading-edge insights into artificial intelligence. The combination of AI and Big Data is fueling the rise of parallel computing, including the creation of hardware accelerators that can mitigate the slowing of Moore’s Law.
  • A deep understanding of the intersection of cloud computing and semiconductors. We help semiconductor companies determine how cloud adoption is affecting product development, organizational structures, market outlooks and operations, from the back office to the front lines.
  • A field-tested approach for unlocking the value of the Internet of things. The exponential growth of real-time data is driving significant research into new chip architectures and materials. We can help you determine which IoT trends are most relevant to your strategy.
  • Hands-on experience helping semiconductor companies disrupt the automotive industry. We help our clients adapt and capitalize on the heightened demands of autonomous driving, including the need for compute-intensive Si at the edge.
  • Strategies for responding rapidly to the demand shifts and supply chain disruptions posed by COVID-19, while simultaneously preparing for a post-pandemic recovery. We can help you quickly adjust to current market realities and capitalize on accelerated demand trends.

We work with companies across all facets of semiconductor design (logic, memory, analog/mixed signal/discrete, electronic design automation) and semiconductor manufacturing (capital equipment, IDM/foundry, assembly, test and packaging) to understand and capitalize on trends, build scale and capacity, grow organically and through M&A, and optimize cost structures, operations, and go-to-market strategies.

Semiconductor and Electronics Manufacturing businesses can experience unforeseen long-term growth by improving productivity, increasing revenue, boosting maintenance efficiencies, and minimizing variation in production output.

 Need an Expert in Semiconductor manufacturing?

Value Driven Solutions has a track record in Semiconductor and Electronic manufacturing improvements that total over $150 million in hard savings.

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