Key Drivers In New Chip Industry Outlook

How well the semiconductor industry fares over the next 12 to 24 months depends upon the evolution of a virus. That alone will determine the correct model for an economic rebound — V, U, extended U, or maybe even a double U.

But what’s also becoming clear is those models don’t apply uniformly to all sectors or sub-sectors of the semiconductor industry. Looked at as a whole, the entire industry is and will continue to be affected. Nevertheless, some areas have seen positive growth. For example, consumer electronics sales have boomed since the start of shutdowns, especially in the area of webcams and gaming. Automotive sales, meanwhile, have slumped, dragging down semiconductor sales in that market. Likewise, the planned rollout for 5G has been pushed out at varying levels across multiple regions, offsetting predictions about equipment sales.

Current models of growth in semiconductors range from +6% in 2020 to -28% in some segments, depending upon the length of the impact, the liquidity of markets over that time, how many more shutdowns there will be, and how quickly consumer confidence rebounds. None of this is clear at this point, and no one is quite certain when it will be.

“Opinions are all over the place,” said K. Charles Janac, chairman and CEO of Arteris IP. “If you look at high tech, about 60% of the segments are down, 40% are up. What’s up is infrastructure, which includes data centers, networking, cameras, security, entertainment and video games. What’s down are the end points — smart phones, cars, some consumer, industrial and automotive. The big question is whether this is due to the pandemic and overreaction, or whether this is going to be a debt-driving mainstream crisis.”

G. Dan Hutcheson, chairman and CEO of VLSI Research, cited similar concerns in a presentation at SEMI’s recent Semiconductor Outlook virtual forum. While noting that the money supply is up with government bailouts, sagging end demand could ripple through the whole semiconductor sector.

“The one thing that’s really important is the money supply was up 10% year over year in March,” Hutcheson said. “This money supply is Divisia M4, which includes includes the money the banks lend out. What made the 2008 downturn so bad was that even though the money supply was rising, the banks weren’t lending it out. They were just putting it in reserves. You didn’t get the action of that money working its way through the economy. That’s not happening now. The money is getting out there. It was 7% in January and February. Now it’s 10%. The 7% was when [the U.S. Federal Reserve feared] we were going into a downturn. So we were already reacting to a slowdown before COVID hit.”

He said that M1, which includes cash and money in checking accounts, was up 25%. That’s a big number, but it’s also a reflection that the overriding concern by economists is the impact on individuals and small businesses. In 2008, the big concern was the failure of large banks and insurance groups such as AIG.

Fig. 1: New cycle, or the same one? Source: VLSI Research

“We’re definitely seeing a slowdown, and we’re thinking that’s going to bleed into the second quarter. The first quarter doesn’t look too bad. The real question is the rest of the year,” said Hutcheson. “Automotive is off 20%. It’s really been hit hard by this cycle.”

Fig. 2: Impact of the slowdown on different market segments. Source: VLSI Research

Still, compared to other market segments, semiconductors are faring well. Marco Chisari, managing director and global head of semiconductor investment banking at Bank of America Merrill Lynch, said the market correction over the past six weeks has been the deepest since 1952.

“We are entering into bear territory with over 75% correction,” he said in a presentation at the SEMI conference. But he added that an injection of $2 trillion dollars into the economy through a stimulus package, coupled with the cost of borrowing money at zero to 0.25%, have helped the stock market to rebound.

“The question is whether during Q2 and Q3 the market can sustain this level of recovery,” Chisari said. “Our industry, and more broadly the electronics industry, is performing the best of many other sectors. Semiconductors has not seen any of the revenue reduction that we are experiencing in transportation, aviation, hospitality and energy.”

In fact, the hardest hit segments of the chip industry since Feb. 19 are those tied to end markets that rely on those end markets. That includes sensors and analog, which are heavily tied to automotive and industrial, as well as discretes, some IP, and IDMs. In fact, according to Bank of America’s credit card spending analysis, online electronics were up 161% year over year in mid-April.

Some positive signs and new opportunities
So what does all of this mean? Given the fragmented nature of the industry and the global markets, answers vary greatly. But in general, demand for EDA tools continues to grow, and so do some of the newer applications of technology.

“Given the competitive intensity and value of semiconductors, R&D and design activity continue regardless of where a company or industry is in the business cycle,” said Aart de Geus, chairman and co-CEO of Synopsys. “Our experience in past downturns is that chip and system design continue throughout. This makes sense, given the relatively long timeframe for design (18 to 24 months), the complexity and impact of current electronics, and the necessity to have products to bring to market coming out of the downturn. AI and machine learning, 5G, IoT, servers, and cloud expansion will continue to drive advanced design at high speed. We don’t see that changing.”

Others agree, and this is evident in some edge applications, where there is a dogfight underway as companies try to stake out claims in brand new applications of technology.

“What we hear from pretty much almost every customer on the edge is, ‘What we want to do is this, but what we’re able to do is much less,'” said Geoff Tate, president and CEO of Flex Logix. “What they’re able to do now is better than nothing, but they are all ravenous for compute capabilities within their constraints of power and cost. So as people say they can give you twice as much throughput for the same power or cost, they’ll flip over it. It’s going to take multiple generations to catch up to what people want, and by the time we get there new neural networks will demand more. This is like the early days of PCs.”

Tate also pointed to a rebound in China. While physical distancing in factories and protective gear are still required, capacity is back up to near or at pre-pandemic rates, according to numerous reports.

“China’s coming back,” said Tate. “Our Chinese activity is back to normal. I’m anticipating that in the second half of the year our business should be about the same. People may be more cautious, and it is quite likely that everybody’s put on hold many of their hiring plans. They’re also not in a rush to go and embark on bold new activities until they make sure that we’re not falling off the edge of the earth. But in the next month or so, we’ll know we’re not falling off the edge of the earth.”

There are new market opportunities opening up as a result of the pandemic, as well, involving medical electronics, particularly in clinical care and consumer devices.

“People talk about medical, which is true,” said Matt Short, senior research director for enterprise and IT at OMDIA. “It’s still pretty small, but it’s the biggest growth area through 2030. Baby boomers are retiring and they’re investing in health.”

OMDIA’s projection is for a 23% compound annual growth rate for medical electronics between 2013 and 2030.

A new way of doing business
“It’s been a long time since I’ve been on late night conference calls with some of the key people we interact with, essentially communicating status,” said Mike Slessor, president and CEO of FormFactor. “In the very short term there’s going to be impact because we had to shut factories down. As we bring them up, that will be done slowly because we need to make sure we have all the social distancing processes in place and make sure we can be safe in a really uncertain environment. As you look further down the road, it’s hard to see how there isn’t some significant degree of demand disruption.”

Some of this will be with us well into the future. Business as usual may change significantly.

“We are fortunate in that for many years, we had already enabled our employees to work remotely, so it has been a relatively smooth transition to have essentially everyone do so,” said Joe Sawicki, executive vice president of Mentor IC EDA. “The lack of face-to-face contact certainly takes something out of the equation. You can’t meet new people at conferences or jump onto a white board as easily, but there certainly are ways around it today. We are using collaboration technologies and holding virtual events. The remarkable communications technologies, infrastructure and bandwidth our industries have created have made it relatively easy to communicate and conduct business remotely for many people and companies. In fact, given we have all been forced into working remotely, it will be interesting to see how the world transitions back to ‘normal.’ What will become the new normal?”

Sawicki isn’t alone in asking that question. “Ensuring that our people can work effectively from home is a huge operational challenge that we executed with great agility and purpose,” said Synopsys’ de Geus. “We continue to innovate, as our R&D operations have transitioned rapidly to a work-from-home environment. Our engineers are adapting quickly. Their ability to access and manipulate huge amounts of customer data and collaborate with their peers, supports our customers well. Simultaneously innovation and development march forward as we stay on track for new and enhanced product delivery. While still in the early stages, we are encouraged.”

VLSI Research’s Hutcheson believes this will be the new way of doing business for many engineers and business executives. He said the continued demand for notebook computers and consumer electronics was a sign that companies and workers are investing in the technology necessary to make this a reality.

Conclusion
It’s difficult to make generalizations about the semiconductor industry. Three months of interviews on the impact of the pandemic begin to paint a clearer picture of what’s doing well, what’s not, and what the prognosis is for different market segments if the pandemic is short or if it drags on. Lockdowns and fears of infection mean people are driving less, which has put a damper on automotive sales, for example. But it hasn’t impacted next-generation chip development for use in vehicles that will debut over the next few years.

As anyone in the tech industry knows, the only way out of a crisis is technological innovation. So if and when a vaccine is developed, or if treatments can be shortened with certainty, then new products and innovations developed during this downturn will hit the market in full force.

But in the short-term, there are still too many unknowns about COVID-19 to predict when economies will return to normal. “We really need to study the enemy,” said Arteris IP’s Janac. “This is not the flu. It’s bigger and more complex. Still, at some point shutdowns have to end. The problem is we don’t know enough about this enemy or how it will end, which means you need to be ready for anything. But a lot of market share victories have been won in recessions.”

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