The semiconductor industry faces potential turbulence if investment in data centres by major tech companies slows down, according to Doug Lefever, CEO of Advantest, the world’s largest provider of chip testing machines. Lefever, whose company plays a pivotal role in the testing of advanced semiconductors, believes that while data centre spending could dip, the demand for artificial intelligence (AI)-enabled smartphones may serve as a buffer for parts of the semiconductor sector.

Advantest, which supplies testing equipment for high-end graphics processing units (GPUs) like those produced by Nvidia, is keenly monitoring the spending patterns of US tech giants such as Meta, Google, and Microsoft. These companies have made substantial investments in data centres that require vast computational power, often using semiconductors at the cutting edge of technology.

“The demand for AI smartphones may not be explosive right now, but if the market catches on, it could lead to a significant surge,” Lefever noted in a recent interview. He suggested that if AI handsets with a “killer app” emerge, the demand for replacements could dramatically increase. Such a shift, Lefever believes, could set off a “crazy” wave of activity, potentially compensating for any slowdown in data centre investments.

However, Lefever also expressed caution about the possible ripple effects of slower spending on data centres, warning that any downturn could have significant consequences across the semiconductor supply chain. “I don’t like to use the word bubble because it implies that it’s going to go away, but there will be cycles,” he said. “When that next cycle comes . . . it could be pretty vicious.”

Advantest’s outlook on the industry reflects its critical role in the semiconductor supply chain. The Tokyo-based company has benefitted from the growing complexity and cost of chips, as demand for more powerful semiconductors has risen. Advantest is a dominant player in the semiconductor testing market, controlling more than 50% of the market share, a position that has resulted in impressive financial performance. The company’s stock has surged by over 80% in the past year, and its share price has increased by nearly 500% over the past five years.

In fact, as chips become more advanced and expensive, the number of times they are tested during production has increased substantially. Lefever explained that a high-end Nvidia GPU, for instance, may now undergo between 10 and 20 tests before being completed, a sharp increase from just five years ago when the figure was in the single digits. Testing times have also lengthened, with the latest Nvidia Blackwell GPU taking three to four times longer to test than previous generations. This trend has led Advantest to raise its income target for the 2024 fiscal year by 16%, forecasting ¥122 billion ($792 million) in net income.

Despite some recent volatility, including a December dip attributed to concerns about potential US sanctions on China under the incoming administration of Donald Trump, Advantest’s strong position in the semiconductor testing market remains intact. While Japan’s dominance in semiconductor production has waned since the 1980s, Advantest is part of a robust cluster of Japanese semiconductor equipment firms that maintain essential market leadership in specialized segments of the industry.

The company’s market share has expanded significantly in the high-end performance testing category, where it now commands over 60% of the market in some areas. Advantest’s machines, which can cost as much as $1 million and contain more parts than a commercial aircraft, are integral to the production of cutting-edge chips. With operations in 18 countries, Advantest remains highly reliant on the Chinese market, which still accounts for between 20-25% of its revenues. However, Lefever expressed confidence in the company’s ability to weather geopolitical tensions, noting that although China’s role in the semiconductor supply chain has diminished recently, Advantest remains resilient.

The company has not been directly impacted by US restrictions aimed at limiting China’s ability to produce advanced technologies, as these sanctions primarily target the fabrication of chips rather than their testing. Lefever added that, even in the event of a complete shutdown of China’s semiconductor industry, Advantest expects enough demand from other regions to offset any losses. When one large Chinese customer was recently affected by sanctions, Lefever said that the lost sales were quickly replaced by other customers, a recovery that took mere months rather than the year-long timeline that many had anticipated.

Overall, while Advantest is monitoring the potential for a slowdown in data centre investment, its outlook remains positive, driven by strong demand for its testing equipment and the emerging potential of AI-enabled smartphones to drive future growth in the semiconductor sector.

Source: Financial Times,