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As we reach the close of 2022, we look back on yet another year filled with challenges and opportunities across the global electronics value chain. As we look back, some of these milestones and events may seem familiar. Many challenges continued to evolve from prior years, with some finally showing signs of relief.
Join us as we explore ten trends that define 2022, with an eye towards how they will inform strategies and business goals in 2023. In part one, we explore the first five entries on the list:
1) The Chip Shortage: Not out of The Woods Yet
Over the past three years, revenue for semiconductor companies and their customers has declined by more than $500 billion worldwide due in large part to the impact of the COVID-19 pandemic. The auto industry has been hit particularly hard, reporting lost sales of more than $210 billion in 2021. While 2022 brought some relief, shortages and supply chain constraints are expected to remain a problem at least through the first half of 2023 and perhaps longer, according to Supplyframe Commodity IQ (CIQ).
According to Gartner, global semiconductor revenue is forecast to grow by 4% to $618 billion in 2022 and contract in 2023 by 3.6% to $596 billion as the global economy slows. Weakness in consumer markets, including electronics, is mainly driven by the decline in disposable income caused by higher inflation and interest rates.
The CIQ forecast projects a modest increase of 27% in semiconductor pricing across all major commodities for H1 2023, compared to 76% in H1 2022. Between Q1 and Q3 2023, less than 20% of semiconductor prices are expected to rise, and just over three-quarters of IC prices will stabilize.
As for availability, the declining lead times in Commodity IQ across all device types are expected to triple quarter-on-quarter through Q3 2023. While long lead times will persist into 2023 for constrained components, microcontrollers and analog ICs, increasing lead time dimensions in Q1 2023 will decline by some 50%. Nearly half of all lead times are projected to stabilize in Q3 2023, with just 4% of the dimensions increasing.
The enterprise markets, including networking, computing, industrial, medical and commercial transportation, have been resilient in 2022 despite the forecast of a global economic slowdown and intensifying geopolitical challenges.
Semiconductor Revenue Forecast, Worldwide, 2021-2023 (Billions of U.S. Dollars)
2021 | 2022 | 2023 | |
Revenue | 595 | 618 | 596 |
Growth (%) | 26.3 | 4.0 | -3.6 |
Source: Gartner (November 2022)
2) 5G is Here, and 6G is on its Way
R&D activities for 6G started in earnest in 2020 and focus on evolving advanced mobile communications technologies, including cognitive and highly secure data networks. In addition, 6G will expand spectral bandwidth by orders of magnitude faster than 5G. Also, 6G will significantly improve download speeds, eliminate latency, and reduce congestion on mobile networks.
In development for the public launch in 2030, 6G will support advanced communications technology, including artificial intelligence (AI), virtual reality (VR) and augmented reality (AR). In addition, the gaming industry is a significant investor in metaverse technology for a variety of applications covering tourism, education and remote work.
China recently launched a 6G test satellite equipped with a terahertz system indicating to the world there is a contest for 6G technology but also geopolitical influence. China has grown economically and politically since the creation of 3G and 4G, and its flagship telecoms firm Huawei is now intent on creating cutting-edge 6G technology.
Even though 6G networks won’t be operational for eight years, research has already started on seventh-generation (7G) wireless technologies, representing a quantum leap in bandwidth to support ultradense workloads. For example, 7G has the potential to enable continuous global wireless connectivity via integration in satellite networks for earth imaging, telecom and navigation. In addition, enterprises could implement 7G to automate manufacturing processes and support applications that require high availability, predictable latency or guaranteed quality of service.
Five 2022 Milestones in the Race to 6G
- South Korea’s Samsung started work on 6G in 2021, with the standard to be completed as early as 2028. Earliest mass deployments in ten years.
- In mid-October 2022, US operators Verizon, AT&T, T-Mobile US and US Cellular joined the Next G Alliance, aiming to steer development of 6G and establish North America as a global leader in the technology.
- In November 2022, China sent a rocket with 13 satellites into orbit with a single rocket, one of the satellites was the world’s first 6G experiment satellite.
- In January 2022, Japan’s NTT Docomo initiated early moves to develop 6G technology with the goal of a commercial launch by 2030.
- In May 2022, China Unicom and ZTE signed a strategic agreement to develop 6G technologies.
Source: Mobile World
3) US CHIPS and Science Act of 2022
In July 2022, the US Congress passed the CHIPS and Science Act to strengthen domestic semiconductor research, design and manufacturing and fortify the US economy and national security. President Biden signed the CHIPS Act into law on August 9, 2022, to reinforce US semiconductor supply chains. In addition, it will create national centers of excellence that align with US semiconductor manufacturing plans, including partnering with friendly nations, semiconductor manufacturing grants, research investments, and an investment tax credit for chip manufacturing.
In 1990, the US produced 37% of global chip production. By 2022, that share had dropped to 12%. The reason? Countries in Europe and Asia increased their investments in chip manufacturing incentives, while the US government did not. Consequently, US government investments in chip research have held flat as a share of GDP for 32 years while other countries ramped up their investments.
The bill appropriated $54.2 billion for subsidies to build chip plants in the US and support US research and development. It provides a 25% tax credit for building and equipping US chip plants, estimated to provide another $24.3 billion in support. It also increases authorization for federal science and technology research and development programs to the tune of $174 billion through 2027 to support the nation’s science and technology base. This investment includes interagency programs to boost technological innovation and help translate federally funded research to commercial applications.
The CHIPS Act aims to fulfill three main objectives:
1) Reduce the likelihood that shocks abroad might disrupt the supply of chips
2) Boost American international economic competitiveness and create domestic jobs
3) Protect semiconductors from being sabotaged in the manufacturing process
One issue of concern with the CHIPS Act is its focus on fabrication, with relatively little attention given to other stages in the chip manufacturing process, such as assembly, testing, and packaging (ATP). Policymakers often refer to semiconductor “manufacturing” when citing statistics that apply specifically to fabrication. The supply chain is only as secure as its least-secure link.
While the passage of the CHIPS Act is certainly helping fabrication diversify, the world’s ATP facilities are concentrated in China, Taiwan, South Korea, Japan, and a few countries in Southeast Asia. The lack of ATP facilities in the US could be an issue if tensions increase between China, its Asian neighbors, and the US.
What the CHIPS and Science Act Offers Participating Companies
- $54.2 billion for subsidies to build chip plants in the US and support US chip research and development.
- A 25% tax credit for building and equipping US chip plants, estimated at $24.3 billion.
- An increase in authorizations for federal science and technology research and development programs, specifically $174 billion through FY 2027, to support the nation’s science and technology base to boost technological innovation and help translate federally funded research into commercial applications.
Source: The CHIPS And Science Act Of 2022
4) Taiwan’s Uncertain Future
Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chip foundry, recently announced it was upping its investment from $12 billion to $40 billion to build not one but two new fabs in Arizona. In addition, TSMC is taking advantage of financial incentives included in the US CHIPS Act. When completed in the next two years, the two fabs will be able to manufacture over 600,000 wafers a year, representing $10 billion in yearly revenue, said TSMC Chairman Mark Liu.
TSMC’s decision comes a few months after US House Speaker Nancy Pelosi’s visited Taiwan in early August. In response, China ratcheted up its military presence in the South China Sea and launched war games near Taiwan, including in Taiwan’s territorial waters. Tensions have been heightened ever since, and China has continued military activities near Taiwan as Taiwan continues to bolster its defenses.
Taiwan produces 90% of the world’s high-end chips. A disruption of its semiconductor industry would likely trigger an economic meltdown that would impact the semiconductor sector and its customers worldwide. However, China is a leading processor of many of the raw materials required to produce semiconductors. In addition, China produces more than 95% of the world’s raw gallium, the metal used in making chipsets for electronic devices such as computer motherboards and portable phones.
Anti-China sentiment continues to build in the United States, as does support for Taiwan. If the new Republican US House Speaker follows in Pelosi’s footsteps and visits Taiwan, it would likely trigger more war games in the South China Sea and raise tensions between Washington and Beijing.
Next year, Taiwan’s main political parties will start gearing up for presidential and parliamentary elections in early 2024. The main opposition party, the Kuomintang, has traditionally maintained close ties with China but denies being pro-Beijing.
5) Friend-Shoring Strategies Might be Short-Sighted
Friend-shoring is a happy-sounding way of terminating business relationships with companies in countries that do not share your country’s political values or manner of doing business. The advanced semiconductor market is an example, specifically the decoupling of China and Russia from doing business with the United States and the West.
In 2016, the Trump administration banned sales to Chinese companies of advanced computer chips and other high-tech products containing US intellectual property (IP) on the US Entity List. For example, the 2018 decision by the Trump Administration to add Huawei to the Entity List banned US companies from selling chips and components to Huawei without obtaining a special permit from the US Commerce Department. SMIC, China’s largest chip company, is another Chinese company the Trump Administration placed on the Entity List.
When he took office, President Biden expanded the ban to include chip and memory-making equipment and chip design software to the list of Chinese entities, which includes about six hundred companies. In addition, many Russian companies were added to the Entity List in 2022 after the February invasion of Ukraine. In October 2022, the Biden administration imposed extensive export controls on artificial intelligence and semiconductor technologies to China, with the goal of retaining US control over “chokepoint” technologies in the global semiconductor supply chains.
Earlier this year, the United States proposed a Chip 4 Alliance with Japan, South Korea, and Taiwan to cooperate more closely in all phases of the computer-chip supply chain, aiming to exclude China in the process. As of December 20, all three countries were on board.
Of course, the future of friend-shoring and trading only with the countries that share your political values and business practices has its downside — specifically, access to capital and the capabilities of the R&D team. Case in point, Beijing has allocated more than $100 billion to develop a domestic semiconductor industry to break dependence on the West. Recently, $26 billion was invested in twenty-nine new wafer-fabrication projects.
Furthermore, well-established semiconductor companies are increasing their investments: Semiconductor Manufacturing International Corp. (SMIC), China’s leading chip manufacturer, has raised its investment to $5 billion this year to expand capacity. Notably, SMIC has announced that it has been able to produce 7 nm chips, something other Chinese chip makers have been unable to do.
What to Expect in Part Two
In part two of this series, we look at five more major trends, ranging from how the chip market is evolving, to the transition from combustion to electric engines in the automotive market. Stay tuned for the second half of this series right here on Supplyframe Resources!