Electronics sector risk report

Global semiconductor sales reached an all-time high in 2021 at USD553bn, up +26% from 2020, making the wider electronic component industry one of the winners from the Covid-19 pandemic.
The current semiconductor cycle has been firing on all cylinders since the industry emerged from its worst recession in 2019 (-12%). Volumes have been driven by unusually strong demand for consumer electronics (PCs, smartphones, audio and video equipment, accounting for 80% of final semiconductor sales), prices have increased because of a tight supply/demand equilibrium and the product mix has improved with the introduction of higher priced, new generation chips using the 5nm manufacturing node.

Looking forward to 2022, we expect all three factors to cool down as final demand growth normalizes and new capacities come online. Sales should grow by another +9% and cross the USD600bn mark for the first time. Further ahead, the industry will enter 2023 in the fourth year of its current growth cycle and is likely to experience a plateau in sales. History shows a semiconductor cycle lasts four to five years and is followed by a period of adjustment lasting twelve months on average. Of note, the recent months have witnessed growing political support for a greater independence from imports from Asia in Japan, North America and Europe. Because they were given a comparatively low priority in the orderbook of Asian manufacturers, their local automotive and machinery industries were hit hard by acute shortages, causing factories to close and translating into billions in lost revenues. While we do not anticipate such moves to challenge Asia’s domination in semiconductor manufacturing in the short term, they will most likely contribute to more balanced trade flows in a more distant future.

Against this generally favorable backdrop of growing demand, we anticipate the risk environment to remain challenging and the sector vulnerable to adverse external shocks.

• The magnitude of the boom in hardware sales (computers, in particular, but also TV sets) in 2020 and 2021 has us believe that demand normalization could hit 2022 sales harder than what the consensus now estimates (low-single-digit growth).
• The global sanitary crisis could continue to disrupt supply chains – so far, the pandemic has been net positive for the industry because it stimulated demand for electronic goods, but any prolonged freeze in manufacturing activity could hurt demand for semiconductors – much like in Q2 2020.
• The so-called US-China tech cold war appears to be at a standstill. In past years, the former US administration implemented a series of regulations to prevent Chinese companies from acquiring critical US semiconductor manufacturing technologies and equipment. Those restrictions have not been lifted since the new US administration took office in early 2021.
• The increasing frequency of unusually adverse climatic events (droughts, but also snowstorms or typhoons) is also becoming a major source of worry for an industry whose profitability relies on optimal capacity utilization.