Featured Stocks: Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM), Renishaw plc (LON: RSW), Alphawave IP Group PLC (LON: AWE), Nanoco Group PLC (LON: NANO), CML Microsystems (LON: CML), Intel Corporation (NASDAQ: INTC), ON Semiconductor Corporation (NASDAQ: ON)
Teaser: Since the onset of the COVID-19 pandemic, the semiconductor industry has been navigating the global chip shortage, which was aggravated by geopolitical issues earlier this year. Furthermore, slowing consumer demand with the current macroeconomic environment dampening consumer spending has been hitting the industry lately. While government and corporate incentives to ramp up chip production should ease the supply shortage, the industry’s near-term prospects could be shadowed by the demand crisis as the global economy is expected to keep slowing.
In this digital era, semiconductors have become the key to survival and prosperity for every economy. And quite reasonably so, as semiconductors are the backbone of a digital economy. Semiconductors are essential to almost every technology, from smartphones to electric cars.
However, the COVID-19 pandemic brought various changes to the industry. Shutdowns of factories, ports and labour shortages have all had massive impacts on the production and supply of semiconductor chips. Meanwhile, according to reports from SEMI the demand for semiconductors skyrocketed 44% to an industry record of $102.6 billion in 2021, as most industries relied on technology to remain operational.
The already constrained global supply chains owing to the pandemic-led disruptions further worsened this year due to the Russia-Ukraine war as the concerned countries control significant supplies of raw materials, including palladium and neon gas, that are key to the production of chips.
Adding to this, if China were to invade Taiwan, the worlds’ most-advanced chip factory would be rendered “not operable,” TSMC Chair Mark Liu said in an interview with CNN.
While the persistent supply chain disruptions are marring the semiconductor industry’s growth, the industry has been witnessing shrinking demand from the end markets due to a significant decline in consumer spending amid the macroeconomic headwinds this year, such as record-high inflation, aggressive interest rate hikes and growing recession odds.
Why Is Demand for Semiconductors Cooling Off?
While the global chip shortage is yet to be eased, the industry has witnessed demand slowdowns with declining consumer spending for electronic devices amid an inflationary environment. June marked the sixth straight month of decline in worldwide chip sales.
While the inflation in the UK slightly eased in August to an annual rate of 9.9% from 10.1% in July as fuel prices declined, it remained close to the 40-year high.
Furthermore, Alex Veitch, Director of Policy at the British Chambers of Commerce (BCC), said, “Our latest quarterly economic forecast will not be of any comfort to either consumers or businesses. The extreme inflationary pressures are only likely to increase as we head towards Christmas, with the UK economy already thought to be in recession.”
The British Chamber of Commerce forecasts a recession for the economy in 2022, with inflation peaking at 14%. However, it expects inflation to slow in 2023 and return to the Bank of England’s 2% target by 2024.
As the economy is weaker amid rampant inflation and consequent interest rate hikes, the major semiconductor industry players are releasing warnings regarding the cooling demand in the computer chip and electronics sectors.
Government Initiatives
Governments around the globe are ramping up R&D and investments to help support the semiconductor industry and are working closely with the leading industry players to help them survive the challenges.
On May 25, the Business, Energy, and Industrial Strategy Committee launched an inquiry into the semiconductor industry in the UK to examine the current and future demand for chips in the computer and electronics industries, the strengths and weaknesses of the industry, and its supply chains. In addition, the committee seeks to understand the numerous opportunities for collaboration with the United States, the European Union, and other allies.
Committee Chair Darren Jones said, “Semiconductors are growing in technological and geopolitical importance. With scarce global supply, it’s essential that we conduct a stock take of the UK’s capacity and what Government can do to raise it. We want to hear from industry, academics, and experts to get a better picture of the UK semiconductor landscape when there are concerns over the future of global supply chains.”
Leading industry players, such as Alphawave IP Group (LON: AWE), Nanoco Group (LON: NANO), and CML Microsystems (LON: CML), should benefit from government and corporate support.
Other governments worldwide are increasing their incentives and investments to ramp up domestic chip production. Last month, U.S. President Joe Biden signed an executive order to implement the funding in the bipartisan CHIPS and Science Act of 2022. Over $52 billion (£45.88 billion) in incentives was allocated to increase domestic production of semiconductors, strengthen R&D leadership, and grow a diverse workforce in the chip industry to drive a competitive edge.
The US CHIPS and Science Act should boost the growth of several US chipmakers, including Intel Corporation (NASDAQ: INTC) and ON Semiconductor Corporation (NASDAQ: ON).
After the passage of the CHIPS Act, INTC’s CEO Pat Gelsinger stated, “I congratulate Congress on voting to approve funding for the CHIPS Act. This is a critical step to support the entire U.S. semiconductor industry and to help ensure continued American leadership in semiconductor manufacturing and R&D. Congress has done its part. Now we are going to do ours. I’m excited to put shovels in the ground as Intel moves full speed ahead to start building in Ohio.”
In addition, European Commission proposed an EU Chips Act, which will be supported by €43 billion (£37.58 billion) of public and private investments to boost its semiconductor industry and address chip shortages and other issues. With this funding, the EU’s share of global microchip production is expected to double to 20% by 2030. The act will ensure that the EU has the essential tools, skills, and technological capabilities to become a leader in the semiconductor industry.
Despite the bearish investor sentiment around the industry, its long-term prospects look bright as both demand and supply side issues are expected to ease gradually.
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