Six months since the pandemic touched all corners of the world is a good time to assess the depth and width of the damage done. One question looms large in the minds of many semiconductor vendors: How long will it take for global market demand to recover and for the supply chain to revive?
How seriously has the global Covid virus infected the electronics industry? Six months since the pandemic touched all corners of the world is a good time to assess the depth and width of the damage done. One question looms large in the minds of many semiconductor vendors: How long will it take for global market demand to recover and for the supply chain to revive?
EE Times sat down with two Yole Développement experts, analyst Eric Mounier and Guillaume Assogba, an economist who oversees Yole’s macroeconomics research.
In their broad-brush assessment, the semiconductor industry has weathered the pandemic OK — thus far.
Given that electronics is ubiquitously used in many devices including industrial, medical and communication products, most semiconductor devices — ranging from DRAM, NAND and CMOS image sensors to Bio MEMS, computing hardware for high performance computers, cloud and gaming — have seen “little to no impact,” according to Yole.
But there is one inescapable fact: The pandemic has devastated the global demand for travel.
The mobility sector — civil aviation and automotive — has gone into paralysis. Electronics devices serving these markets are severely affected, and their market recovery is likely to take years. The demand has clearly slowed for electronics devices that include radar, sensing and computing devices for advanced driver-assistance systems (ADAS), GaAs (6-inch wafer) and application processing units.
However, doing a technology-by-technology or device-by-device market analysis might well overlook the emergence of a potentially huge macro-economic impact.
Yole economist Assogba pointed out that not just the electronics industry, but many economists are struggling to forecast how the market will recover from this recession. We’ve heard from economists who draw the shape of the Covid-19 recession as a V, U, W or L. This alphabet soup proves just one conclusion: nobody really knows.
Why is this forecast so hard? Perhaps because the world has never experienced the double whammy of a “demand shock” and a “supply shock” at the same time, Assogba explained.
He noted, “Simultaneous negative supply and demand shocks on the economy” are making conventional supply and demand curves move. That shifted equilibrium is forcing everyone into uncharted territory in the global market.
Modeling the Covid-19 recession forecast based on what the world went through during the 2008 financial crisis could be misleading. That recession was triggered by demand shock, said Assogba, while little change took place in supply.
In normal times, the market is aware of the prevailing balance between consumer and produce surplus. Consumer surplus is the difference between the price that consumers pay and the price they are willing to pay. On a supply and demand curve, it’s the area between the equilibrium price and the demand curve.
Produce surplus is the difference between the price companies receive and their ideal selling price. On a supply and demand curve, it is the area between the equilibrium price and the supply curve, as Asogba explained.
That’s pretty much what you learn in your Economics 101 class.
But in today’s market situation, that familiar demand-and-supply equilibrium model has shifted, Assogba noted. In the Covid-19 recession, producers sell goods at a slightly higher price but in greatly reduced quantities, resulting in a deep erosion of the wealth created by producers. Meanwhile, this also induces a large loss for consumers, who pay more to buy and consume goods in greatly reduced quantities.
Economists admit they know little about how to deal with the simultaneous demand and supply shocks.
By tracking the world’s gross domestic product (GDP) growth and in major economies based on the raw data from the International Monetary Fund (IMF), Yole shared the chart below. It clearly shows an imminent economic recession not just in one nation, but throughout the world. Among all major economies, China appears suffering least, but still the GDP of the second largest economy too has gone into a dip.
Yole calls 2020 “probably be the worst year in terms of economic growth of the last decades.” While the chart traces back to the financial crisis of 2008, Assogba said that even scanning data back 50 years, “we’ve never experienced before the simultaneous negative demand and supply shocks like we are seeing today.”
The pandemic alone isn’t harming the global economy. Other factors — all erupting in close succession — have created “a snowball effect,” noted Yole’s Mounier.
The triggers for an erosion of the global economy — happening pretty much simultaneously — are a U.S.-China trade war launched in January 2018, the oil price shock triggered by Russia and Saudi Arabia in the first quarter of 2020, a general or partial lockdown that has progressively swept the world since January, and a historic recession begun in the second quarter of 2020.
This confluence of untoward events could get even worse, cautioned Yole. For example, the U.S.-China trade conflict appears now to be escalating into an economic cold war. The economic/financial crisis will undoubtedly linger into 2021 and 2022. The world is also seeing the beginning of a geographic supply chain reorganization expected to continue for years.
The outbreak of the coronavirus in 2019 raised considerable concerns among many stakeholders in the electronics industry. While industry players initially focused on the short-term impact on supplies of key raw materials, parts and components in February, their anxieties steadily ballooned. They have begun to question the long-term viability of China as a leading — and in some cases the only — source of essential materials and components.
An emerging trend is to make supply chains more regionalized or even localized. The goal is to make the availability of such materials and components less vulnerable to political or economic disruptions, as well as climate change or more infectious diseases.
In parallel, the pandemic has awakened North America, alerting leaders to the need to make semiconductors closer to home, a topic largely ignored before the Covid-19 outbreak and the escalating trade war with China. U.S. politicians, bureaucrats and lobbyists are now talking it so seriously they’ve introduced legislation such as the CHIPS for America Act.
Whether this awareness births an actionable plan to revive U.S. semiconductor production is far from clear. But the seeds are planted.
And then there’s the automotive industry, one of the hardest hit segments in the global economy.
The Covid economy has already had a drastic negative impact on the auto industry, with more changes on the way and a heavy dose of uncertainty. What we have learned from the last few months offers some perspective on the likely future.
As Egil Juliussen, an automotive industry analyst, wrote: “Global auto sales dropped like a rock and will remain well below recent yearly sales for five years and possibly longer depending on region.” He noted that 2020 will have the largest yearly sales drop — 22% to 69.6 million units — versus 89.4 million units in 2019 according to an IHS Markit press release on April 30, 2020.
He predicts lower auto sales and revenue to significantly reduce R&D funds for autonomous vehicle development. As a result, more AV tech startups, if they haven’t gone under already, are likely to get snatched up by major OEMs (e.g., Nvidia partnering with Mercedes-Benz; Zoox selling to Amazon; Uber acquiring Postmates, TuSimple launching an AV freight service with UPS and McLane, Ford bets all of its ADAS on Mobileye).
Carmakers, traditionally notorious for going it alone rather than teaming up with their traditional rivals, will likely inch toward tighter partnerships with tech companies or other OEMs.
While the robocar dream is unlikely to die, the Covid economy has delayed many AV projects. Certain AV segments — road goods or sidewalk delivery — however, might have better prospects, according to Juliussen.
Meanwhile, expect carmakers to start talking about ADAS more often than AVs, while prioritizing battery EVs ahead of AVs. But the automotive market’s full recovery is likely to take more than a few years.