What will 2024 hold for the semiconductor sector?

3 Jan 2024

Image: © Vladyslav/Stock.adobe.com

After an uncertain couple of years, it looks like the chips industry is finally bouncing back, but ongoing challenges must still be addressed.

The last five years have seen a particularly turbulent time for the semiconductor industry. Increasing trade war tensions between the US and China have resulted in tech restrictions and outright bans between the two countries. US sanctions on Huawei in 2019 led to the Chinese company opting to hoard components to guard against being cut off from its primary semiconductor suppliers.

The US and its allies believe China is importing advanced chip technologies from the West crucial to the development of AI, which could be deployed for various military uses. Therefore, chip manufacturing became a major focus of these geopolitical tensions in 2023, when the US and several other countries put sanctions in place to curb exports of chip-related technologies to China.

In response, China restricted the export of gallium and germanium – two metals that are critical for the manufacturing of semiconductors.

When the chips were down

But while the US-China chip war has come to the forefront in the last year, these tensions go back much further and in the middle of this difficulty came the Covid-19 pandemic. The global shutdown of many factories, particularly in Asia from which much of the global supply comes, put an added pressure on the semiconductor industry.

As a result of this intense chip shortage, many companies began stockpiling chips to build up their inventories, while several players in the West have developed their own national strategies and acts – such as the EU Chips Act – to boost semiconductor production on this side of the globe. However, the latter half of 2023 saw demand for certain chip-related products dying down and many businesses have tightened their spending, leading to a glut in the global market.

And according to data from Pitchbook, VC investment in the semiconductor market has been on a downward trajectory, declining in 2023 to a total of $10.3bn, compared to $12.8bn in 2022 and $16.1bn in 2021. So, where does all that leave us as we look ahead to this year?

Bouncing back

Fortunately, while 2023 was a year in which the sector was struggling to find the balance between famine and feast, industry experts are estimating the semiconductor market will recover with growth of between 13pc and 20pc.

The International Data Corporation (IDC) said it expects better semiconductor growth visibility this year as supply and demand finds a better balance within PCs and smartphones – two of the largest chip market segments. Additionally, elevated inventory levels in the automotive and industrial areas are expected to return to normal levels in the second half of 2024 as electrification continues to drive chip demand.

Rudy Torrijos, a research manager on IDC’s Enabling Technologies and Semiconductor team, said the market is returning to sustained growth.

“While inventory levels remain elevated with suppliers, visibility has clearly improved in the channel and with [original equipment manufacturers] in key market segments,” he said, adding that revenue growth is expected to match end-user demand in the first half of this year. “As a result, we expect [capital expenditure] to improve subsequently, initiating a new investment cycle within the supply chain.”

Gartner forecasts similar growth this year, with global semiconductor revenue projected to grow almost 17pc to total $62bn. This growth, according to the analytics company, is expected to come from a dramatic rebound in the memory market and developments in generative AI and large language models.

The most modest growth prediction comes from the World Semiconductor Trade Statistics (WSTS) organisation, which expects a 13pc increase in 2024, with growth largely coming from the memory sector.

While the estimated growth is a positive sign of recovery, challenges remain that could cause bottlenecks. Legislative instruments such as the EU Chips Act have laid the groundwork in pumping much-needed investment into their respective sectors. But a skills shortage in the sector still poses a major threat and is an important one to address as demand for chips returns this year.

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Jenny Darmody is the editor of Silicon Republic