According to a report by Deloitte, revenue for the global semiconductor chip industry is forecast to grow 10% in 2022 to reach over US$600 billion.
The same report mentioned that the absence of a single critical chip — often costing less than a dollar — could prevent the sale of a device worth thousands of dollars across multiple markets. The report stated that the shortages and supply chain issues should ease by the second half of 2022, but longer component lead times could stretch well into 2023.
Gartner predicted in July that global revenue for the semiconductor chip industry would grow at a slower 7.4% in 2022.
“Although chip shortages are abating, the global semiconductor market is entering a period of weakness, which will persist through 2023 when semiconductor revenue is projected to decline 2.5%,” said Richard Gordon, Practice VP at Gartner.
“We are already seeing weakness in semiconductor end markets, especially those exposed to consumer spending. Rising inflation, taxes, and interest rates — together with higher energy and fuel costs, are putting pressure on consumer disposable income. While the consumer space will slow down, semiconductor revenue from the data center market will remain resilient for longer (20% growth in 2022) due to continued cloud infrastructure investment.”
A recent Reuters report stated that cloud and data centers — the chip industry’s strongest sector — may see a slow down as consumers who had signed up for cloud-based entertainment are reducing their subscriptions and data center companies have opted to gradually update their equipment and infrastructure, rather than rapidly scale investment in these areas.
With economists hinting toward a recession, advertisers have also been tightening their budget and leading tech giants have reported slow annual cloud revenue growth rates for the second quarter earnings season — Alphabet Inc.’s Google Cloud dropped over eight percentage points, Microsoft Corp’s Azure by six, and Amazon’s AWS over three percentage points.
The major reasons for a decline in the chip market include:
- Shortage of chips: Sumit Sadana, Chief Business Officer, Micron Technology Inc., told Reuters that it’s not just slow growth of the cloud market that’s causing trouble. Part of the problem was a shortage of some chips holding up servers from being built, leading to a pile-up of other chips — a situation like the auto-chip shortage.
- Shortage of talent: The ongoing talent shortage will be made more severe by the addition of increased semiconductor manufacturing facilities outside Taiwan, China, and South Korea. The higher demand for software skills required to program and integrate chips into fast-growing markets will further exacerbate the shortage.
Vijay Guntur, President, Engineering and R&D Services, at HCLTech commented: “Global chip shortages have strained multiple industries and spiked demands for chips across consumer electronics, automotive and other high-tech led verticals. These industries are drawing investments to increase in-house chip development capabilities and now, almost a fifth of the overall ER&D spend can be attributed to silicon engineering."
The major factors that contributed to the chip shortages around the globe include geo-political tensions, the shutting down of manufacturing facilities across industries due to the pandemic, followed by disruption in the global supply chain, and burgeoning demand for electronics amid the pandemic. Guntur opined that these major factors accelerated the demand and aggravated shortage across key industries.
How are companies responding?
Tech giants, like Apple, Amazon, Facebook, Tesla, and Google, have shifted their focus toward in-house development of semiconductor chips, shifting their reliance away from third party suppliers.
For example, Apple is in the final year of replacing the Intel chips in its Mac laptops and desktops with its own in-house processors, modeled on its high-end A-series chips in flagship iPhones and iPads.
Samsung Electronics, the world’s largest memory chip designer and second-largest chip contract manufacturer, stated recently that it plans to invest $15 billion by 2028 to drive leadership in chip technology.
Its new semiconductor R&D complex in South Korea’s Giheung will lead advanced research on next-generation devices and processes for memory and system chips, as well as development of new tech based on a long-term roadmap.
What are the benefits of developing in-house chips?
Cost: Developing in-house semiconductors solutions allows greater control over cost optimization
Time-to-market: Custom in-house semiconductor development enables faster time-to-market
Flexibility: Time and cost management provides a way to adapt to the market requirement by utilizing in-house flexibilit
Features: Ability to control different types of features based on the target domain and application requirements
Applications: Options to expand application portfolio by driving different development approaches in-house
Dependency: Eliminate the need to be dependent on third party to develop solutions
A CNBC report said the global chip shortage — due to disruptions in the supply chains — is one of the key factors that prompted several large technology companies to take things into their own hands. The shortage created an opportunity as it is easier and more cost-effective to design your own chips instead of using the same generic chips that are being used by all competitors. The report added that these tech giants are finding it more lucrative to integrate their software with their tailor-made semiconductors.
In the long run, semiconductor revenues are likely to fluctuate around a trend line with chips becoming essential across all industries. The risk associated with not developing an in-house chip might be far greater than not planning for it.
What do you need to design in-house chips?
Qualified team: Teams with different sets of skills are the driving factor for in-house semiconductor development
Acquisition of missing IP and talent: Acquiring IP and talent to drive next-gen products, such as artificial intelligence (AI) and 5G, and solutions
Adequate investment: Investment to drive high R&D activities
Clear roadmap: Clear plan to capture market with product features
Balanced insource versus outsourced strategy: Balancing products by utilizing outsourcing when required
Removing bottlenecks: Removing any decision-making bottlenecks to drive smooth product development
Guntur added: “While a recovery mandates interventions from governments and the entire semiconductor ecosystem, to cater to increased demand, firms are leveraging a disaggregated chip-design strategy to cut down on development time and costs. While System Integrators are building capabilities to address the service needs of OSATs (Outsourced Semiconductor Assembly and Test manufacturing vendors) and fabs, Engineering Service Providers are being leveraged for silicon design, embedded software, and integration of digital tech.”