The global supply chain has been severely disrupted over the past few years, most notably by a shortage of semiconductors, which was caused by high demand during the pandemic.

For two years, the electronics industry has been suffering, but chip levels appear to have returned to normal somewhat as device sales slowed and inventories began to recover in late 2022.

However, the question of whether the chip shortage is over is not as black-and-white as you might think.

Market Conditions

John Waite, vice president of global supply chain at Genpact, a global professional services firm, said chip shortages have eased for certain industries, such as consumer electronics, due to a looming recession, the ballooning cost of living and rising inventory levels leading to lower demand.

"This demand weakness is expected to spread to the enterprise market in 2023," he said.

For non-storage chips, he said, order backlogs will be cleared, inventories will be overstocked and lead times will be shortened, while automotive and autonomous driving demand remains very strong.

"The semiconductor market is entering a major adjustment cycle as demand for PCs, smartphones, tablets and consumer electronics declines sharply," Gaurav Gupta, a Gartner vice president analyst, said in a recent Q&A session conducted by the research firm.

Gupta said that while overall, chips are no longer in the "shortage zone," there is still an inventory imbalance, as some chips are in sufficient supply while others are in short supply.

For example, despite the supplier production slowdown, but due to weak demand for end devices, the memory market this year will be a serious oversupply, he said. This is also expected to affect analog components.

"Overall, most chip categories are showing improved inventories," Gupta said.

While consumer demand for semiconductors continues to decline, the enterprise market, including networking, servers and storage, should also see a significant oversupply of chips, which will help ease inventory imbalances and lower pricing, he said.

"Consumer electronics are leading the downward adjustment," agreed Mark Granahan, co-founder and chief executive officer of iDEAL Semiconductor.

Memory prices are falling, Granahan said, while inventories of communications and commodity analog/power components have increased significantly, and bookings are down as subcontractors deplete their inventories in response to lower demand. The first and second quarters of the year were impacted, but "the third/ fourth quarter is expected to return to a more balanced demand profile."

According to Gartner's preliminary results, chip spending by the top 10 global OEMs decreased by 7.6 percent in 2022, representing 37.2 percent of the total market. Most of the top 10 semiconductor customers are major PC and smartphone OEMs.

The chip shortage is not completely over, "but we expect it to continue to ease next year as global demand slows and the market balances out," said Tom Stringer, national head of site selection and incentive services for BDO USA. a group of international public accounting, tax and consulting firms.

Stringer said that despite the improvement, "we are seeing a surplus of some components" due to lower consumer demand for electronics and automobiles in 2022.

"For some parts, such as those used by PC and server manufacturers, supply is outstripping demand, which is forcing down the price of those parts," he continued.

At the same time, he added, demand for specific types of chips remains high, including those used by automakers and for 5G.

"Automakers in particular continue to face serious challenges in getting the chips they need, which is forcing some manufacturers to continue to cut production or rewrite software to use different or fewer chips," Stringer said.

CHIPS bill expected to bring impact

The CHIPS Act, passed in the summer of 2022, is part of an effort to improve U.S. competitiveness against China and mitigate some of the supply chain disruptions caused by Asia.

"The industry is eagerly awaiting the formal application to begin the review and funding process," Stringer said. "We expect the application to be ready by the end of February or early March."

John Neuffer, president and CEO of the Semiconductor Industry Association, said in a statement, "Since the introduction of the CHIPS Act, companies in the semiconductor ecosystem have responded enthusiastically, announcing new projects across the U.S. that total hundreds of billions of dollars in private investment and support hundreds of thousands of American jobs."

Neuffer added that efficient and timely implementation of the CHIPS Act will maximize the impact of the new law and reinvigorate U.S. chip production and innovation for many years to come.

Mike Burns, managing director of Murray Hill Group, an investment management firm focused on technology and supply chain products, echoed those sentiments.

"I am hopeful that CHIPS and the Science Act will jumpstart not only a renewal of technology leadership, but also a renaissance of American manufacturing," Burns said. "It's time to create a secure supply chain closer to home or among allies that minimizes the potential for IP loss."

He added that if funding is allocated with careful consideration of these issues, "we will be back at the forefront of this technology that defines society."

Stringer believes the CHIPS ACT has already had the desired effect of making the U.S. a more competitive choice for semiconductor production.

"Many manufacturers are still planning to be onshore or nearshore," he said. "In fact, we're in the early stages of migrating the semiconductor ecosystem."

While building new fabs will take time, "organizations will also be looking for the most strategic opportunities to move production of chips, designs, packaging photomasks and other key components as close to the U.S. as possible to serve this shift," Stringer said.

The CHIPS Act and similar support from EMEA are driving a strong effort to rebalance global supply, Waite observed, "but at an absolute level, it's far below Asia. Samsung's [greater than] $400 billion visionary commitment, along with TSMC's $100 billion investment in Taiwan and $40 billion in Arizona, is alarming."

Looking ahead

According to the SIA, global semiconductor industry sales total $573.5 billion in 2022, a record high and up 3.2 percent from $555.9 billion in 2021. But sales slowed in the second half of the year, with December 2022 global sales of $43.4 billion, down 4.4 percent from November 2022.

However, Neuffer said he believes the semiconductor market will regain strength in the long run.

"Despite short-term fluctuations in sales due to market cyclicality and macroeconomic conditions, the long-term outlook for the semiconductor market remains very strong as chips play an increasing role in making the world smarter, more efficient and more connected," Neuffer said.

Genpact's Waite also paints an optimistic picture, but notes that "as the industry is expected to grow from $583 billion in 2021 to $100 billion in the next few years, there will certainly be areas where demand will outstrip supply."

While 2023 is a "clear pullback," Waite said, "the path to a $1 trillion semiconductor industry is still in sight, although there is an incredible talent war to be resolved in terms of resiliency, chip capacity and expansion of the supply base across the supporting ecosystem and for the industry to grow. battle for talent."

In addition, he said, COVID-19 policies, sanctions and IP restrictions will be factors in the coming years. However, all signs point to balance and some surpluses in several market segments by the second half of 2023 - and balance and restrictions in some areas by 2024, he said.

"Developing new regions, such as India, will take time and significant investment because the infrastructure is not yet in place," Waite said.

While global investment will continue to grow at a high rate, the challenges of meeting talent needs, developing resilient and sustainable supply chains and addressing complex geopolitical issues "will be part of the new normal for the semiconductor industry and will have to be addressed,'' he said.