Why the announced end of the shortage will not save the semiconductor sector

A study by the consultancy firm Roland Berger foresees an imminent end to the global shortage of chips under the effect of a sharp slowdown in demand. However, the sector needs an increase in its investments to optimize its production in the long term.

The semiconductor sector has seen the end of the tunnel. Much disrupted by the pandemic, this part of the market should soon see the end of the shortage that has affected it for almost three years. In any case, this is one of the views established by the advanced technology center of the strategy consulting company Roland Berger in the September report entitled. Semiconductors: a new form of problem on the horizon? This issue means that, despite the assurance of short-term projections, the real challenges in the sector are more structural than cyclical and require a long-term response.

The advancement of teleworking has ended

The German company’s experts first noted that the consumption of electronic products fell in recent quarters after a sharp increase during the pandemic. To illustrate this development, Roland Berger mobilized the figures of the annual income generated by the semiconductor sector provided by his American counterparts from the company Gartner. After a 26.3% increase in revenues between 2020 and 2021, the sector should register an annual increase of only 7.4% in 2022 then a drop of 2.5% in 2023.

This negative change is mainly due to the decrease in computer purchases, which has not been done before for almost a decade. It comes after a prosperous period of the pandemic that, faced with the generalization of teleworking, saw many manufacturing companies increasingly ordering chips to meet demand but also to protect their production. Today, many of these companies carry large inventories of semiconductors, reducing their demand from chipmakers.

The growth in demand for smartphones and PCs from remote working is clearly missing. And we should be cautious of the risks that the inventory adjustments are not as light [certaines entreprises] expected a few months ago”, warned the chief analyst of Rakuten.

Operating capacities towards their normal levels

This retreat in demand has a direct impact on supply from producers. According to data from the Semiconductor Industry Association (SIA), fab floors are operating at 93% capacity by the start of 2022 compared to around 97% last year. Although this percentage remains above the usual level of 80%, the company Roland Berger expects it to approach it in the coming months. Here too, the stocks of semiconductors manufacturers have been rising continuously for almost a year and are approaching the critical excess threshold according to the Gartner company index.

It is likely that there will be several episodes of overstock next year,” said a market expert contacted by Roland Berger.

The proof of this is the ratio between inventory and sales of 22 electromechanical systems, which has increased by nearly 50% between its average in the period 2012-2019 and the year 2021 alone. a rapid correction in stocks. “Given the level of shortage, double order […]we believe that future inventory corrections will be very abrupt, leading to a potentially larger decline in earnings […] than the bear cycles of 2019 and 2016”, fears an analyst.

The industry and its automotive sector are among the main victims

All industrial sectors and especially the automotive sector are the main victims of these deficiencies because they use a lot of analog integrated circuits and microcontrollers that themselves are victims.

Investments in analog chips are expected to increase but may not be enough to meet the increased demand for chips in cars,” said a market expert.

If manufacturers are increasing the capacity of small semiconductors (less than 40 nanometers), they are also doing the same for large sizes (up to more than 450 nanometers) to meet a rebound in demand. .

An inadequate plan in Europe

To complete its comments, the advanced technology center of the Roland Berger firm also analyzed the recent plans of the major Western powers to gain sovereignty in the semiconductor market in order to be less exposed to the possible future crisis of supply. According to him, the Chips and Science Act passed by the United States in August suffers from a short-sightedness despite a large envelope of 223 billion dollars, 53 of which are entirely dedicated to chips.

The situation seems more critical for the European Union whose Chips Act seems to be out of the challenge with a “small” budget of 43 billion euros. However, the goal is to represent 20% of world production in 2030 against 10% currently with the help of incentive schemes to attract investment in this area. Especially since Asian countries also plan to invest to become market leaders: 200 billion dollars for China and even 450 billion for South Korea.

Immediate and lasting solutions

For the German consulting company, the most urgent action is optimized inventory management, which makes it possible to maintain the right quantity to face the next supply interruptions. In the long term, experts suggest in particular the increase of sources of supply or the collaboration with manufacturers of semiconductors.

Electronic components manufacturers must adapt their designs and sourcing strategies to protect long-term production as supply chain risks are highly unpredictable and industry fundamentals remain unchanged. .

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