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By Alexander Jones, International Banker

Few material products are more foundational to the modern world than semiconductors. With billions of transistors now possible on just a single chip, these hugely intricate devices underpin many of the most useful and cutting-edge innovations that power the global digital economy. This has been no more acutely observed over the last 18 months or so than in the chips being produced for the buoyant generative AI (GenAI) industry. After a rocky 2023, is the industry back on course for robust growth this year?

Last year was undeniably challenging for semiconductors. The Semiconductor Industry Association (SIA), a global industry body that represents 99 percent of the US semiconductor industry by revenue and nearly two-thirds of non-US chip firms, reported in February that the global semiconductor industry’s sales for 2023 totalled $526.8 billion, a hefty 8.2 percent lower than 2022’s all-time high of $574.1 billion.

According to Deloitte, it was the volatile market for memory chips—chips that function to store and retrieve data and preserve critical information—that caused the downturn. “In 2022, memory sales were almost US$130 billion, or just under 23 percent of the overall chip market, but they dropped 31 percent (about US$40 billion) in 2023, compared to down 1 percent for logic [logic chips are used for computation, processing data and executing instructions],” Deloitte noted in its “2024 Global Semiconductor Industry Outlook”. “The market is expected to get almost all of that back in 2024, with sales expected to reach 2022 levels. If we exclude memory, the rest of the industry was down in 2023, but only by about 3 percent.”

Much of the decline in 2023 was also confined to the first half of the year, with sales picking up formidably in the second half. Fourth-quarter (Q4) 2023 sales were 11.6 percent higher year-on-year to reach $146.0 billion and were also 8.4 percent more than the third quarter (Q3), which meant that the industry had gathered significant growth momentum as it entered 2024. “Global semiconductor sales were sluggish early in 2023 but rebounded strongly during the second half of the year, and double-digit market growth is projected for 2024,” said John Neuffer, the SIA’s president and chief executive officer. “With chips playing a larger and more important role in countless products the world depends on, the long-term outlook for the semiconductor market is extremely strong.”

Indeed, the SIA’s figures for May 2024 saw global semiconductor-industry sales hit $49.1 billion, a massive 19.3-percent increase on May 2023’s total of $41.2 billion and a hefty rise of 4.1 percent compared to April’s $47.2 billion. “The global semiconductor market has grown on a year-to-year basis during each month of 2024, and year-to-year sales in May increased by the largest percentage since April 2022,” according to Neuffer. “The Americas market experienced particularly strong growth, with a year-to-year sales increase of 43.6 percent.”

On June 4, the World Semiconductor Trade Statistics (WSTS) released its latest forecast for the global semiconductor market, in which it anticipated “robust growth” for 2024 and 2025. As such, a strong recovery is expected for 2024, compared with last year’s largely underwhelming performance, with the WSTS projecting 16-percent growth in the global semiconductor market this year to reach a market valuation of $611 billion.

“For 2024, mainly two Integrated Circuit categories are anticipated to drive the growth for the year with [a] double-digit increase, Logic with 10.7 percent and Memory with 76.8 percent. Conversely, other categories such as Discrete, Optoelectronics, Sensors, and Analog Semiconductors are expected to experience single-digit declines,” the WSTS noted. “The Americas and Asia-Pacific regions are projected to see significant growth, with increases of 25.1 percent and 17.5 percent, respectively. In contrast, Europe is expected to show marginal growth of 0.5 percent, while Japan is forecasted to see a slight decline of 1.1 percent.”

As for 2025, solid market growth is expected to continue throughout the year, with the WSTS forecasting a 12.5-percent expansion to reach an estimated valuation of US$687 billion. Again, this growth is expected to be mainly driven by the Memory and Logic sectors, which are each on track to surpass $200 billion in 2025. If achieved, it would represent growth of 25 percent and 10 percent, respectively, from 2024’s forecasts. “All other segments are anticipated to record single-digit growth rates,” the WSTS also noted. “In 2025, all regions are poised for continued expansion. The Americas and Asia-Pacific are expected to maintain their double-digit growth on a year-over-year basis.”

What is driving this semiconductor resurgence, then? For one, the astronomical growth of GenAI is having an increasingly profound impact on chip development. “This growth is fuelled by advancements across several key chip technologies, including logic processors built on cutting-edge nodes, high-bandwidth memory (HBM3), advanced 2.5D packaging, and advanced connectivity chips,” Deloitte also stated.

Gartner, meanwhile, projected in late May that revenue from AI semiconductors globally will reach $71 billion in 2024, which would represent a massive 33-percent expansion from 2023. “Today, GenAI is fuelling demand for high-performance AI chips in data centres. In 2024, the value of AI accelerators used in servers, which offload data processing from microprocessors, will total $21 billion and increase to $33 billion by 2028,” said Alan Priestley, Gartner’s VP Analyst. “While AI semiconductor revenue will continue to experience double-digit growth through the forecast period, 2024 will experience the highest growth rate during that period,” Gartner added. “In 2024, AI chips revenue from compute electronics is projected to total $33.4 billion, which will account for 47 percent of total AI semiconductors revenue. AI chips revenue from automotive electronics is expected to reach $7.1 billion, and $1.8 billion from consumer electronics in 2024.”

And with the United States and China jockeying over accessibility to—and control of—the global chip-making supply chain, semiconductors have never been more important from a global geopolitical perspective. And that means, as has been the case in recent years, that the welfare of Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest manufacturer of advanced chips and chipmaker for Apple and Nvidia, remains fundamental to the outlook for global semiconductors.

Thanks largely to the growing global AI boom that is powering soaring investments in data centres across the world, TSMC announced on July 10 that revenue for June came in at NT$207.9 billion, which means that a whopping 40-percent growth was registered for the entire second quarter, at NT$673.5 billion, against analyst estimates of a 35.5-percent rise. The results swiftly followed news that TSMC’s market capitalisation had briefly passed the $1-trillion mark on July 8, as businesses worldwide continued to expand their chip-buying for their AI-powered IT (information technology) infrastructures.

In particular, demand for Nvidia chips has helped TSMC’s earnings surge, while reports of a solid recovery in smartphone sales after last year’s slump are also proving hugely supportive. Indeed, the International Data Corporation (IDC) reported in June that global smartphone shipments increased 6.5 percent on an annual basis to reach 285.4 million units in the second quarter of 2024. As such, the market-intelligence firm forecasted the smartphone market to reach 1.21 billion units shipped in 2024, up 4 percent from the 1.16 billion units shipped in 2023, before climbing to 1.30 billion units in 2028 at a compound annual growth rate (CAGR) of 2.3 percent.

“In terms of end markets, both PC and smartphone sales are expected to grow 4 percent in 2024, after 2023 declines of 14 percent and 3.5 percent, respectively,” Deloitte also predicted in its “2024 Global Semiconductor Industry Outlook”. “Returning to growth for these two end markets is likely important for the semiconductor industry: In 2022, communication and computer chip sales (which include data centre chips) made up 56 percent of overall semiconductor sales for the year.”

The proliferation of 5G networks and the corresponding demand for 5G devices will also drive considerable growth for advanced semiconductors that can support faster speeds and more advanced connectivity. “5G-powered devices continue to fuel the market as these devices will display a near 16 percent growth in 2024 as adoption continues to expand across all regions and markets,” said Anthony Scarsella, research director with the IDC’s Worldwide Quarterly Mobile Phone Tracker. He also stated that he expected 13.2-percent growth in 2025 as 5G’s market share climbs to 74.4 percent from 67.2 percent in 2024. “With 5G devices becoming less relevant in most developed markets, the growth of 5G in emerging markets will play a central role in driving shipments throughout the forecast period,” Scarsella predicted. “With the overall smartphone demonstrating a CAGR of 2.3 percent from 2024 to 2028, 5G shipments will display an imposing 9.1 percent growth rate for the same period.”

“I remain bullish on the industry reaching $1 trillion around the end of this decade. Fast-growing demand for a diverse range of disruptive technologies and emerging applications—from AI, autonomous and electric vehicles, and high-performance computing to 6G and autonomous machines—will fuel this historic expansion,” Ajit Manocha, president and chief executive officer of semiconductor market-intelligence firm SEMI, wrote in February. “To support anticipated industry growth, 109 new fabs [semiconductor fabrication plants] are expected to come online between 2022 and 2026, according to our most recent SEMI World Fab Forecast report. Fully 89 of these fabs have already either begun operation, equipping or construction and, of course, more fabs will be needed through the end of the decade to support burgeoning demand for chips.”