Consultant Insight: Semiconductor production expands amid softening demand

Geopolitical concerns are driving semiconductor production growth beyond Asia, where 75% of semiconductors are currently produced. Global semiconductor supply chains were severely disrupted throughout the COVID-19 pandemic, prompting delays in manufacturing that relied on semiconductor chips. “Recently, geopolitical developments have been evolving in front of us,” C.C. Wei, chief executive at Taiwan Semiconductor Manufacturing Company (TSMC), told analysts Wednesday during the company’s fourth-quarter earnings call. “100% in one place cannot suffice our customers’ needs. Therefore, we started the overall global footprint planning.” In Japan, TSMC is building a specialty technology fabrication facility. In Europe, the company is evaluating the possibility of building a specialty facility that focuses on automotive-specific technologies. Meanwhile in the U.S., TSMC is building two, advanced semiconductor fabrication facilities in Arizona. [caption id="attachment_76185" align="alignright" width="298"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo World columnist[/caption] “TSMC’s decisions are based on our customers’ needs and the necessary level of government support, and this is to maximize the value for our shareholders,” Wei told analysts. “Our decisions are also based on the talent pool, land, electricity and water needs for TSMC’s long-term growth.” The supply chain’s scramble for semiconductor chips created a reliance on airfreight in the past few years, and the shift to more steady production may impact overall flown airfreight volumes in the upcoming year. The volatility of semiconductor production has prompted some stakeholders, like forwarder Kuehne+Nagel , to implement new quality assurances for customers. CHIPS and Science Act Because of the pandemic-related disruptions and heightened geopolitical tensions, U.S. President Joe Biden signed the CHIPS and Science Act in August 2022. The Act’s purpose is to strengthen the U.S. economy, national security, supply chain resiliency and technology leadership, according to the Semiconductor Industry Association (SIA)’s “State of the U.S. Semiconductor Industry" report. In addition, the Act provides incentives for semiconductor manufacturing to lower the cost gap between investing in the U.S. and abroad. In 2021, about 46% of U.S.-headquartered firms’ front-end semiconductor wafer capacity was located in the U.S., a share that has steadily decreased from 57% in 2013. The average rate of chip- manufacturing output has grown five times faster overseas than in the U.S. over the past decade, according to the SIA. This is primarily due to robust incentive programs other countries have put in place to attract semiconductor manufacturing. The SIA further notes that from the time the CHIPS Act was initially introduced in 2020, there have been $180 billion in company investments in the U.S., including 46 new semiconductor ecosystem projects. Semiconductor market grows In 2021 there were record semiconductor sales of $555.9 billion and record unit shipments of 1.15 trillion, with U.S. semiconductor exports totaling $62 billion — the fourth-highest among U.S. exports behind airplanes, refined oil and crude oil, according to SIA data. Most semiconductors sold to customers today — 80% — are sold outside the U.S. market. However, excess inventory buildups in 2022 resulted in a slowdown in semiconductors. “As overall macroeconomic conditions remain weak, we expect our business to be further impacted by continued end market demand softness and customers’ further inventory adjustment,” TSMC CFO Wendell Huang told analysts during the earnings call. 2023 outlook TSMC expects reductions in semiconductor supply chain inventories to continue into the first half of this year and then to rebalance to a “healthier level” in the second half, executives said. However, there are still some industries in which semiconductor demand remains tight. Most notably, the automotive industry , where TSMC sees demand continue to increase. Global semiconductor revenue is projected to decline by 3.6% in 2023, according to the latest Gartner forecast. “The short-term outlook for semiconductor revenue has worsened,” said Richard Gordon, practice vice president at Gartner. “Rapid deterioration in the global economy and weakening consumer demand will negatively impact the semiconductor market in 2023.” However, the automotive sector is the most important industry for driving semiconductor company revenue in 2023, replacing the wireless communications industry, according to respondents of a KPMG survey . KPMG predicts automotive semiconductor revenue will reach $200 billion annually by mid-2030 and surpass $250 billion by 2040.

Consultant Insight: Semiconductor production expands amid softening demand

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