Key Takeaways
- The semiconductor industry is emerging from a significant downturn that began in late 2022, but the recovery is proving to be highly uneven across different market segments.
- Artificial Intelligence is the primary engine of growth, driving unprecedented demand for high-performance GPUs and High Bandwidth Memory (HBM), benefiting companies like Nvidia, SK Hynix, and Samsung.
- In contrast, consumer-facing markets such as PCs and smartphones, along with the industrial sector, are still grappling with high inventory levels and sluggish demand, leading to a ‘K-shaped’ recovery.
- The memory chip market (DRAM and NAND) is rebounding sharply after major producers made aggressive production cuts in 2023, with prices now rising due to tightening supply and strong AI-related demand.
- Whilst the long-term structural growth drivers for semiconductors remain robust, investors must be discerning, as the broad-based upcycle has not yet materialised and near-term performance is highly dependent on end-market exposure.
The semiconductor industry, a sector famously prone to more violent swings than a metronome in an earthquake, appears to be turning a corner. Yet, to declare a wholesale recovery would be premature. The story of 2024 is not one of a rising tide lifting all boats, but rather a powerful current propelling AI-focused vessels whilst leaving others stranded in the doldrums of inventory correction.
After a brutal downturn that saw the market contract by 8.2% in 2023, the first contraction since 2019, forecasts for the current year are optimistic. The World Semiconductor Trade Statistics (WSTS) organisation projects a robust 13.1% rebound in 2024. However, a closer look at the data reveals a deeply fractured market, where fortunes are dictated almost entirely by one’s proximity to the Artificial Intelligence boom.
A Familiar Rhythm of Boom and Bust
Semiconductor cycles are an unavoidable feature of the industry, driven by a fundamental mismatch in timing. Building a new fabrication plant (a ‘fab’) is a colossal undertaking, costing billions of dollars and taking several years to complete. This long lead time means that capacity decisions are made based on demand forecasts that can be rendered obsolete by the time the fab comes online. When demand surges unexpectedly, as it did during the pandemic, supply cannot keep pace, leading to shortages and soaring prices. Inevitably, manufacturers respond by aggressively adding capacity. This often coincides with a normalisation of demand, creating an oversupply, a collapse in prices, and an inventory glut—the precise scenario that unfolded from late 2022 through 2023.
The Post-Pandemic Inventory Hangover
The 2022-2023 downturn was a classic case of the ‘bullwhip effect’. The pandemic-fuelled demand for work-from-home technology like PCs, tablets, and network equipment led to widespread panic-buying and double-ordering by device manufacturers. When consumer spending patterns shifted back towards services and were squeezed by inflation, this created a mountain of unsold chips throughout the supply chain.
The impact was most severe in consumer-facing markets. Global PC shipments, for example, fell by a staggering 14.8% in 2023, following a 16.5% decline in 2022. The smartphone market fared similarly, with 2023 shipments falling to their lowest level in a decade. This weakness has persisted into 2024, with companies exposed to these end-markets, such as Intel and AMD in their client computing divisions, still navigating a challenging environment.
AI: The Engine of a K-Shaped Recovery
Whilst the consumer market languished, the generative AI boom created a separate, insatiable source of demand. Training and running large language models requires immense computational power, fuelling unprecedented orders for high-performance GPUs, dominated by Nvidia. The company’s data centre revenue has exploded, quadrupling year-on-year in its most recent fiscal quarter, a testament to the sheer scale of this new demand driver.
This has bifurcated the industry, creating a distinct K-shaped recovery where different segments move in opposite directions. Companies supplying the AI ecosystem are thriving, whilst those tied to consumer, industrial, and broad automotive markets are experiencing a much slower, more painful recovery.
| Market Segment | Key Drivers | 2024 Outlook | Key Companies |
|---|---|---|---|
| Data Centre / AI | Generative AI model training and inference | Very Strong Growth | Nvidia, AMD (MI300), Broadcom, Marvell |
| Memory (DRAM & NAND) | Production cuts, rising prices, HBM for AI | Strong Rebound | Samsung, SK Hynix, Micron |
| Personal Computing | Inventory correction, weak consumer demand, ‘AI PC’ refresh | Modest Recovery | Intel, AMD |
| Smartphones | Market saturation, extended replacement cycles | Slight Growth / Flat | Qualcomm, MediaTek, Apple |
| Industrial & Automotive | Inventory digestion, slowing EV sales growth | Weak / Negative Growth | Texas Instruments, STMicroelectronics, NXP |
Memory’s Painful but Necessary Diet
The memory market, encompassing DRAM and NAND flash, is often the most volatile segment of the semiconductor industry. It experienced a particularly deep slump, with revenues plummeting by over 30% in 2023. In response, the three dominant players—Samsung, SK Hynix, and Micron—took the painful but necessary step of dramatically cutting production and reducing capital expenditure.
This strategy is now paying dividends. With supply severely constrained and demand for specialised High Bandwidth Memory (HBM) for AI accelerators surging, prices are rising sharply. Market intelligence firm TrendForce reported that contract prices for both DRAM and NAND have been increasing for several consecutive quarters in 2024. This segment, once the epicentre of the downturn, is now leading the recovery in terms of revenue growth, illustrating the classic cyclical dynamics of the industry.
Navigating the Uneven Road Ahead
The evidence points to a semiconductor cycle that has clearly bottomed out. However, the path forward is not a straightforward ascent. The industry’s recovery is being almost entirely underwritten by AI. The broader market for chips used in everyday electronics, factories, and cars remains tepid, hostage to inventory levels and macroeconomic uncertainty.
For investors and industry observers, the key is to look beyond the headline growth numbers. The structural trends of electrification, connectivity, and artificial intelligence ensure the long-term health of the semiconductor industry is not in doubt. The challenge in the near term is navigating a recovery that is rewarding a narrow slice of the market with extraordinary growth, whilst the rest patiently waits for its own cyclical turn.
References
Gartner. (2023, December 6). Gartner Forecasts Worldwide Semiconductor Revenue to Grow 17% in 2024. Retrieved from https://www.gartner.com/en/newsroom/press-releases/2023-12-06-gartner-forecasts-worldwide-semiconductor-revenue-to-grow-17-percent-in-2024
International Data Corporation (IDC). (2024, January 15). Global Smartphone Shipments Slip to a Decade Low in 2023, But a Recovery is Expected in 2024, According to IDC Tracker. Retrieved from https://www.idc.com/getdoc.jsp?containerId=prUS51776424
International Data Corporation (IDC). (2024, April 8). The Global PC Market Grew Nearly 3% in the First Quarter of 2024, According to IDC Tracker. Retrieved from https://www.idc.com/getdoc.jsp?containerId=prUS52033224 (Note: This report covers Q1 2024 growth but references the full-year 2023 decline of 14.8%).
Nvidia Corporation. (2024, May 22). NVIDIA Announces Financial Results for First Quarter Fiscal 2025. Retrieved from https://nvidianews.nvidia.com/news/nvidia-announces-financial-results-for-first-quarter-fiscal-2025
Semiconductor Industry Association (SIA). (2024, February 5). Global Semiconductor Sales Decrease 8.2% in 2023. Retrieved from https://www.semiconductors.org/global-semiconductor-sales-decrease-8-2-in-2023/
TrendForce. (2024, May 2). DRAM Contract Prices to Rise by 3–8% in 2Q24, HBM Prices to Surge, Says TrendForce. Retrieved from https://www.trendforce.com/presscenter/news/20240502-12121.html
World Semiconductor Trade Statistics (WSTS). (2023, November 28). WSTS Forecasts the Annual Global Semiconductor Market to increase by 13.1 percent in 2024. Retrieved from https://www.wsts.org/76/wsts-forecasts-the-annual-global-semiconductor-market-to-increase-by-131-percent-in-2024
