Paul van Gerven
31 January

The semiconductor industry thinks it has entered an era of growth almost unfettered by cyclicality. Don’t believe it, says one contrarian analyst.

The semiconductor industry has lined up over 450 billion dollars for capacity expansions, not far off from the size of the entire market in 2021. Historically, such capital expenditure would make a lot of people nervous. Adding that much capacity would surely overshoot demand, driving average selling prices down and sending the industry into another one of its infamous downturns.

Such fears seem to have disappeared. The current narrative is that the industry has entered a new era. Gone are the days that the industry growth is primarily powered by a single killer application – the PC, the internet, smartphones. Thanks to rapid digitalization and the rise of disruptive technologies, there will always be a number of applications to sustain semiconductor growth.

“I really don’t believe that we’ll predict the future semiconductor total addressable market by studying the cycles of the past; we’re in a unique market, not just because of the pandemic but for the ubiquitous spread of semiconductors into all aspects of life and end products and I can only visualize this increasing rather than decreasing in the future,” a “highly knowledgeable commentator” told EE News Europe.

Many a CEO in the semiconductor supply chain has echoed these sentiments. “I believe this is a value reset for the semiconductor industry, which is here to stay,” NXP chief Kurt Sievers said at his company’s investor event last November, referring to markets springing back to life after the pandemic-caused slowdown. “In the next ten years, we’ll see the rise – you could even say explosion – of smart connected devices.”

ASML’s Peter Wennink has repeatedly asserted that the industry has structurally underestimated semiconductor demand. At the equipment maker’s latest earnings call with investors, he said that since nobody seems to be able to accurately predict the need for semiconductor capacity, the industry might as well embrace the long-term view. And that view is growth. “The compound annual growth numbers for the semiconductor industry will lead to a trillion-dollar business by the end of the decade,” Wennink stated.

Wennink acknowledged that building a lot of big fabs in a relatively short time might create situations of overcapacity, but these don’t worry him. Thanks to the strong underlying growth trends, the industry will quickly grow into them, he believes. “Ultimately, it’s about whether you believe society needs more technology solutions that are driven by semiconductors. Sure, when a lot of capacity is added at the same time, it will give some short-term disturbances. But longer-term, I don’t see an issue,” he said at a press conference discussing Q4 and full-year 2021 results.

Mismatch

It’s not the first time that a golden era for semiconductors has been proclaimed. In 1995, Dataquest predicted a doubling of the market – not in ten years but five. “This is the semiconductor stairway to heaven,” the market researcher prophesied. Cyclicality had gone out for lunch.

In reality, the market needed more than a decade to double in size, and the dotcom bubble made painfully clear that up and downturns were still very much part of life in the semiconductor industry. And yet, by the mid-00s, during a couple of years of consecutive growth, the supposed departure from historical patterns popped up once again a few years later. The Great Recession put an end to that euphoria.

So, why would the situation be different now? One brave analyst believes it isn’t. Never afraid to take the contrarian view, Future Horizons’ Malcolm Penn predicts the industry is heading for a nasty downturn. “It’s simply a question of when: the fourth quarter of this year or the first quarter of 2023,” he said during his company’s yearly forecast event. Interesting detail: Penn was the only analyst to correctly predict the 2021 ‘supercycle.’

Penn cited plenty of evidence for the impending crash. For example, the capex announced by major players, measured as a percentage of sales, is 75 percent above the long-term average. He also said double ordering is commonplace at the moment, which leads to overly optimistic capacity projections. At some point, users will begin to burn off excess inventory and prices will fall. “Enjoy it while it lasts because the long-term IC ASP growth rate is zero,” he warned.

Ultimately, however, it’s about what’s driving semiconductor markets. Is it applications like the PC a couple of decades ago and 5G, edge computing and AI today? No, says Penn, the industry has always responded to such trends. The market “is driven by cyclicality, which in turn is driven by the mismatch between supply and demand. Demand is short term and turns on a dime. Supply, however, is very slow to change.”

There may very well be healthy long-term growth trends bolstering semiconductor demand, as there always have been, but that doesn’t mean it won’t be a bumpy ride anymore.