Covid-19 is expected to have an unprecedented impact on the global economy but with different consequences by market...
The Covid-19 pandemic delivered an enormous global shock, leading to steep recession in many countries. According to the International Monetary Fund (IMF)’s October 2020 predictions, the effects of Covid-19 will result in a 4.4% contraction in global gross domestic product (GDP) in 2020 — despite the unprecedented policy support that helped to limit the damage. Although the global economy is expected to rebound strongly in 2021, with GDP growth of 5.2%, the semiconductor market has been adversely affected by the pandemic.
Yole Développement (Yole) has analyzed the different markets where innovations are closely linked to semiconductors: telecom and infrastructure, mobile and consumer, defense and aerospace, medical, industrial, automotive, and mobility (Figure 1).
Market-Specific Semiconductor Forecasts
Covid-19 is expected to have an unprecedented impact on the global economy but with different consequences by market. The pandemic is similarly affecting demand for automotive, laptops, IoT applications, and other devices that rely heavily on semiconductors — which has an impact on the semiconductor industry.
In the next five years, semiconductor demand will remain saturated, with just 1.3% growth overall. And yet the impact of Covid-19 on different semiconductor markets will not be uniform. In 2020 consumer and mobile markets, Yole expected a reduction of between 9.5% and 3% in smartphone units and between 3% and 1% in tablets. Our range of estimates reflects the unpredictability of the level of health crisis to come. Wearables and other IoT devices look better, with growth at ~7%.
Automotive and mobility will suffer because the dramatic drop in the demand for cars will lead to a considerable market decline. OEMs involved in autonomous cars will delay new projects, but it’s not all negative. Although automobile demand will weaken, semiconductor content will increase — driven by autonomous driving, the shift to electrification, and more sophisticated infotainment systems, with 1.8% Compound Annual Growth Rate (CAGR) predicted between 2019-2025.
Civilian aeronautics will suffer much more, with significant restructuring over the coming years. It is likely that civilian aeronautics will generally decline through 2024. Although some regions such as China could recover earlier, i.e., 2022, while others regions like Europe could take longer.
On the other side of the spectrum, telecom and medical should suffer less. Telecom operators are determined to continue to accelerate 5G deployment in 2021. Plus there is still a strong push from China to bolster the economy with 5G. It is strategically important for China because of its trade war with the United States. In fact, compared to the rest of the world, China is probably two years ahead in 5G, in terms of services and infrastructure.
Data centers are also weathering the storm. Increased network activity (e.g., media streaming, work from home) and inventory built to hedge against supply chain disruptions have created stronger demand than expected in the first half of 2020. In medical, areas directly linked to Covid-19 — ventilators, respiratory diagnostics, research tools for studying the virus, and patient monitoring — have seen positive growth, while other healthcare areas have experienced moderate to no impact.
At a high level, data centers and networking system demand will grow at ~2%, driven mainly by 5G, artificial intelligence (AI) and high-performance computing (HPC) applications. The good news is that semiconductor hardware demand will grow even faster in these markets due to an increase in the IC chips number per system.
After two successive high-growth years, the global semiconductor market declined 12% year-over year (YoY) to $412 billion in 2019. We attribute this decline to the cyclicality in product pricing, sluggish smartphone demand, and global trade unrest. According to the Semiconductor Industry Association (SIA), annual sales declined across all regions: Europe (-7.3%), China (-8.7%), Asia Pacific/All Other (-9.0%), Japan (-10.0%), and the Americas (-23.8%) (Figure 2).
While Covid-19 has adversely affected most parts of the semiconductor industry, Yole expects an overall negative growth rate ( -3% YoY, figure 3 below). However, in 2021 the market is expected to recover strongly and grow at 15% YoY. Long-term growth drivers should remain intact. AI, 5G, HPC, and smart automotive, IoT/IIoT, hyperscale data centers, and Industry 4.0 will be key drivers creating growth across various segments: consumer and mobile, automotive, infrastructure, medical, and industrial.
What Can We Expect in a Post-Covid World?
The Covid-19 pandemic has necessitated changes in people’s home and work lives that have also affected the semiconductor business. Indeed, the trends toward work from home and changes in home-entertainment consumption will be with us for some time.
With more employees working from home, there’s been a surge in demand for the technologies that enable computing and communications equipment to work efficiently and effectively. Fiber-to-the-home (FTTH) and Wi-Fi 6 routers are growing increasingly popular with the larger number of home workers who need high internet bandwidth.
We’re also seeing higher demand for computing equipment (PCs, laptops, tablets) for home use. There’s also been a massive effect on entertainment. As many people stay at home and don’t go to theaters — or even venture outdoors — the demand for home entertainment is exploding. Streaming video services such as Netflix and Amazon Prime are becoming increasingly popular, placing more demand on cloud computing and servers.
Trade Wars and Semiconductors
Beyond these Covid-19-spawned general trends, other factors will affect the semiconductor industry in years to come. The U.S.-China trade war will negatively affect the semiconductor industry, promoting the increasing uncertainty in the supply chain. This will damage Chinese tech companies (more than U.S. tech companies) because China’s semiconductor development and production is still highly dependent on foreign companies, relative to manufacturing tools, software, and core components — of which the majority are from the United States. As this tech dispute between the U.S. and China continues to drag on, in the near term it’s close to impossible to finalize M&A deals between U.S. and Chinese companies, which involve clearance from both countries’ regulators. Consequently, there will be a reshaping of the semiconductor supply chain.
U.S. tech-sector backlash is now compelling Chinese semiconductor enterprises to become more self-sufficient. Meanwhile, the temporary alternative is to switch suppliers. For example, Huawei is switching suppliers from Skyworks, Qorvo, and Broadcom (U.S. suppliers) to Murata (Japanese supplier) and to Richwave (Taiwanese supplier). China will also accelerate the development of a local semiconductor supply chain. As we look ahead, Taiwan and other Asian countries will benefit as more U.S. companies look for alternative sources to produce semiconductor components at competitive prices.
— Eric Mounier, PhD., is fellow analyst at Yole. Guillaume Assogba, PhD, serves as an economist at Yole.