COVID-19 Casts Clouds Over Chip Forecasts

Article By : Barbara Jorgensen

The Covid-19 outbreak is so unprecedented that experts can’t draw on past crises to measure the pandemic’s impact on the chip market...

With each passing week of what the IMF has taken to calling the Great Lockdown, the semiconductor industry has been adjusting its economic forecasts downward. McKinsey is the latest to chime in; it said it expects sales demand in the global chip market will decline between 5% and 15% in 2020, with steep declines anticipated for some IC market segments that will overwhelm the gains it still expects in others. That’s the most dire projection thus far.

The pandemic is taking its toll on the global economy, and each successive estimation of the potential damage is more pessimistic. The International Monetary Fund (IMF) on April 14 said it now expects global gross domestic product to shrink by 3% in 2020; in January, the IMF was predicting growth in global GDP of 3.3%. “This makes the Great Lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis,” the IMF said.

The range of McKinsey’s projection — 5 to 15 percent — is particularly wide, but perhaps understandably so. The Covid-19 outbreak is so unprecedented in the global economy that experts can’t draw on past crises to measure its potential impact on business. The 2008-2009 Global Financial Crisis, for example, offers few lessons. The trigger for that was the sub-prime mortgage crisis, which was almost exclusively financial in nature. The world’s current problems are different and far more complex, with a pandemic leading to business shutdowns that have induced a shock to global supply and demand, which in turn is damaging the global economy.

 

McKinsey, chip demand, 2020
(Source: McKinsey)

Research firms IC Insights and Gartner have also revised their projections downward; IC Insights predicts a 4% drop for this year, and Gartner forecasts a 0.9% decline in semiconductor revenue.

PC/server
Demand for PC and server chips is forecast to drop by 1% to 7%  percent this year, according to an April report by McKinsey. Demand for PC semiconductors is expected to decline by 3% to 9% in 2020 as companies delay planned hardware upgrades and other long-term migration projects. Stable laptop and tablet demand will partly offset this drop, since many consumers will upgrade their private IT infrastructure to support their work or homeschooling activities.

However, these one-time IT equipment upgrade will not be repeated to the same extent in later years if the downturn persists and consumers cut back spending even further. This fact, combined with enterprises decreasing computer replacements to manage their liquidity, could further erode semiconductor sales after 2020 if the Great Lockdown persists.

The semiconductor market for servers could increase by 1% to 7% this year, McKinsey reports, driven by a strong uptick in video streaming and conferencing as more people work from home. Demand for enterprise IT and enterprise cloud solutions is expected to remain stable or show a minor decline as some companies cut IT budgets while others accelerate their cloud-migration plans.

Increased server demand may not persist past 2020, however. If the global economy continues to struggle after the fourth quarter of 2020, more companies will cut IT budgets — a trend that will outweigh any additional increases in video streaming.

Wireless communication
Demand for chips used in wireless communication applications will see one of the sharpest drops in 2020, with an expected decrease of 11% to 26%. The level of mobile-phone sales, the primary demand driver in this category, has historically been well correlated with GDP and thus is expected to drop significantly over the coming months.

Sharp decreases have already been documented in areas where Covid-19 is prevalent, especially China.


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McKinsey expects consumer preferences will shift to less expensive phones, which will also negatively affect demand for semiconductors. Apple, in fact, on April 15 released its latest iPhone SE at a price point of $399 — its least expensive smart phone in four years.

The recovery of mobile-phone sales will vary by geography, with China likely to see an uptick before Europe and the United States, since its economy is closer to recovery.

For wireless communication infrastructure — 5G in particular — McKinsey expects two different demand patterns. In areas that have not launched 5G networks, telecom providers will likely postpone investments and instead focus on improving their existing networks to accommodate rising data traffic. By contrast, some telecom providers in areas that already have 5G will double down on their investments, especially if governments provide subsidies in an attempt to stimulate the local GDP.

chip demand, 5G

Wired communication
Demand for semiconductors used in wired communication applications will increase by 8% to 11% in 2020 because of several pandemic-related factors, including:

  • more security upgrades for existing enterprise infrastructures as more employees work from home
  • a more than 50% increase in fixed broadband usage in some countries, leading to more purchases of cable/DSL and wireless routers as workers upgrade internet connections in private home offices
  • higher internet traffic, which will spur demand for switches and routers
  • greater demand for cloud services and associated computing nodes, which will increase the need for optoelectronics in data center fiber connections
  • a more than 40 percent increase in video streaming across many networks

Even if the economic downturn persists after 2020, demand for chips used in wired communication will still grow. Annual growth may not remain as high as the 8% to 11% seen in 2020, however, since many of the mentioned investments are one-time purchases that will reduce future replacement needs.

Consumer electronics
McKinsey forecasts demand for consumer-driven chips will drop by 2% to 12% in 2020. While significant, this decrease is lower than the drop seen within wireless communication—another area where end-market sales are closely tied to local GDP.

Consumer electronics are faring better than wireless communication because of a recent rise in demand for gaming devices, audio equipment and some kitchen appliances as people are spending more time at home. Although this increase has partly offset the significant declines reported for other consumer-electronics products, these one-off purchases will not persist over time. The decreased demand for consumer-electronic semiconductors will extend beyond 2020.

Automotive
Sales of semiconductors for automotive applications primarily depend on car sales volume and the level of vehicle digitization and electrification. Since global automotive demand has already fallen sharply this year and will likely decline further over coming months, the automotive chip market is expected to decrease by 10% to 27% in 2020, McKinsey reports. Semiconductor companies will likely not feel any effect until late in the second quarter, however, due to the long lead times of automotive semiconductors.

Hybrid electric vehicles (HEV) and electric vehicles (EV) drive chip demand since they contain more semiconductors than combustion-engine vehicles. Currently, McKinsey expects that the decline in demand for HEVs and EVs will be similar to that for other vehicles, leaving their market share constant. That said, semiconductor companies should watch out for certain developments that might increase or decrease the share of HEVs and EVs in the market. For instance, increased government subsidies may spur additional demand for HEVs and EVs, while less stringent emissions regulations or continued low oil prices might push sales down.

Industrial applications
Although medical electronics factor into the industrial market, semiconductor demand will still drop between 1% and 11% this year, according to McKinsey. Other industrial end-markets include aerospace equipment, power and energy products, as well as upgrades to lighting solutions.

Chip demand for Covid-19-related medical devices, such as ventilators, X-ray machines, and diagnostic tools has sharply increased since the start of the outbreak. However, there will be even steeper demand declines in other areas that will offset such extreme demand spikes for critical treatment products because many hospitals are postponing purchases to improve liquidity.

Overall in the industrial sector, companies are expected to postpone infrastructure investments, reduce manufacturing activities, or decrease operations this year.

Signs of progress
China offers a potential blueprint for economic recovery. McKinsey, in a webinar with SEMI, estimates that China’s rigorous containment efforts could help its economy bounce back in as little as six months – a V-shaped rebound. Western nations generally have not been as forceful with their containment measures. For them, the fight against the pathogen could be prolonged, deepening the economic damage.

Governments are trying to strike the delicate balance between safeguarding the lives of people – critical forces of economic growth through consumer spending – and limiting the economic shock. Once return-to-work protocols are in place and Covid-19 has been brought under control, the faster workers can get back to their jobs. McKinsey believes resolving such issues is not only possible but necessary for a return to normalcy.

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