The COVID-19 crisis is unprecedented in our time. While the recession during the financial crisis from 2007 to 2008 was driven by stagnating consumer demand, the COVID-19 situation induced a shock to both global demand and supply, creating a dual challenge. This unique phenomenon makes it difficult to extrapolate from past crises to make predictions.
We can expect demand to decline by 5 to 15 percent for the semiconductor industry as a whole this year compared to 2019 (Exhibit 1). Breaking down this projection by major end markets—PC or server, wireless communication, wired communication, consumer electronics, automotive, and industrial applications—shows that demand shifts vary greatly, with steep declines anticipated for some markets and gains expected in others. These differences can be explained by the diversity of underlying trends that affect demand for semiconductors, and the varying
Like all business leaders, semiconductor executives are wondering how they can adapt to sudden changes in demand, as well as other uncertainties associated with COVID-19. They may find a path forward by following a framework that McKinsey created to assist companies on their journey to the next normal. It includes five stages: resolve, resilience, return, reimagine, and reform.
Most semiconductor companies have already passed through the first two phases or are currently addressing challenges related to reduced workforce availability and near-term cash management. Experience has also shown, however, that companies should do far more than handling operational challenges during economic downturns if they want to emerge stronger post-crisis. Despite focusing on operational issues that require immediate attention, semiconductor leaders would also benefit by thinking ahead—and that will involve progressing through the return, reimagine, and reform phases as quickly as possible.
Many emerging segments will provide semiconductor companies with abundant opportunities, particularly semiconductor use in the Automotive Sector and Artificial Intelligence.
|Understanding the automotive sector’s unique hurdles|
In the Automotive Sector, the adoption of safety-related electronics systems has grown explosively. Semiconductor components that make up these electronic systems will cost USD600 per car by 2022. Automotive semiconductor vendors will benefit from a surge in demand for various semiconductor devices in cars, including microcontrollers (MCUs), sensors and memory. Automation, electrification, digital connectivity and security will result in the addition of more semiconductor content to automotive electronics and subsystems in the next decade.
When it comes to requirements, the automotive electronics market is vastly different from the consumer electronics market. For example, consumers seek the latest, leading edge technologies in cell phones. However, in automotive, some sensors are still being manufactured concern, so there is little incentive to move to 7nm sensors like those in cell phones. In addition, the failure rate requirement is much more stringent in the automotive space, because when a cell phone goes down a simple reset can fix the issue, which is not possible for a car on the road. A 10% failure rate might be acceptable in the mobile space for suppliers, but automakers will want less than one defective part per billion (DPPB) for 15 to 20 years.
The Artificial Intelligence, semiconductor scene has seen a race not just at the application level, but also at the semiconductor chip level, where different architectures are vying for a piece of the pie. The cloud is the biggest market for AI chips, as their adoption in data centers continues to increase as a means of enhancing efficiency and reducing operational cost.
AI chip deployment is not limited to the cloud, but can also be seen in a wide variety of network edge devices such as smartphones, autonomous vehicles and security cameras. Most AI chips at the edge are inference chips, and they are becoming increasingly specialized. The AI inference chip market is expected to grow at a CAGR of 40% and reach USD2 billion by 2022.
Leading Country – Mainland China is undoubtedly the most active region in East Asia. Its M&A volume had a compound growth rate of 24% from 2014 to 2018. For example, in 2018, Alibaba acquired Hangzhou C·SKY. Before this, Alibaba had invested in five chip companies: Cambrian, Barefoot Networks, Deephi Tech, Kneron and ASR.
M&A activity in Japan, South Korea, and Taiwan was relatively quiet compared to China. The main motivations for deals there are strengthening market position and expanding market share, as well as searching for emerging applications.
Semiconductors: Indian Market Focus
The covid-19 outbreak will drag the growth of the semiconductor industry by 0.9% in 2020, Gartner has said, revising its earlier growth forecast of 12.5%.
The research firm reduced its 2020 revenue forecast for the industry by $55 billion to $415.4 billion.
Gartner expects the “non memory” market to decline 6.1%, while the memory market will grow 13.9%, offsetting the overall decline due to lockdowns. The memory market revenue will account for 30% of the worldwide semiconductor market in 2020.
The semiconductor market’s downturn is of course because of the outbreak’s impact on the entire industry. Lockdowns enforced by the spread of covid-19 worldwide have not only affected manufacturing of devices, but also dragged consumer demand.
In India, the government has stopped all electronics manufacturing, shut down retail stores and stopped sale of electronics online as well. Consumer demand has fallen since people are confined to their homes and are spending money on groceries and other supplies.
While industry bodies like the India Cellular and Electronics Association (ICEA) and the Manufacturers Association of India (MAIT) have written to the government to allow the sale of mobile phones, laptops and some other products online during the lockdowns.
India is strategically building an electronics system design manufacturing industry. Currently nearly 3000 chips are designed every year in India, with more than 30,000 engineers working on different aspects of chip design and verification.
Thanks to the Government of India initiatives to boost the economy, like the Make in India program, 100% foreign direct investment (FDI), and support of subsidies and incentives, which are strategically paramount for job creation and skill development, semiconductor chip design and manufacturing in India should greatly benefit with investment proposals.
Focus must also be made on small- and medium-enterprises to take up chip manufacturing, as is the case in China, Taiwan, and Thailand. This will certainly, make India self-reliant as well as self-sufficient in semiconductor chip production, and will fill the gap in the country’s electronics production capabilities.
It is encouraging to note that India has signed a MoU with the Singapore Semiconductor Industry Association to develop trade and technical collaboration in electronics and semiconductor industries. Companies are now recognizing the potential of the electronics sector in India and investing heavily in manufacturing.
For example, Panasonic Corp. is developing a new plant in Haryana, which will produce refrigerators and build a R&D centre for appliances for the Indian market. India is an ideal location for global R&D. The Semiconductor Complex in Chandigarh is a strategic fabrication facility. The Gallium Arsenide (GaAs) fabrication facility in Hyderabad is important from the defence R&D point of view. Bangalore is emerging as a hub for innovating start-ups in the semiconductor field.
There is an urgent need to meet the import challenges since most of the electronic components come from abroad. The growth of digitalization in India is increasing consumer demand for electronics, and hence, the need for domestic electronic production capabilities. However, from the country’s strategic point of view, this bulk of consumer demand must not be met through imports alone. Hence, the case for a self-reliant indigenous semiconductor manufacturing industry for India.
A good degree of freedom must be given to the industry given that India has several strategic technology development activities. Since the semiconductor fabrication industry is intellectual capital intensive, India has a great strategic advantage and competitive edge, given its large educated youth population and a huge number of engineers it produces annually.
It is a capital-intensive industry and so requires risk-taking for entrepreneurs and venture capitalists. It is hence, a strategic necessity for India, on multiple levels, to have an independent semiconductor industry given its “to be superpower status” in the world today.
A few personal insights here, based on decades of market understanding, studies, surveys, reports, and one on one conversations with industry leaders and decision-makers:
- South Korea and Taiwan have not suffered noticeable manufacturing loss
- USA is asking for the semiconductor industry to be declared as essential infrastructure’ and/or ‘essential business’
- China which accounts for almost 50 percent of the world’s consumption of semiconductors took a knock for a whole quarter, but has started operations again
- Board-level design and software development work had slowed down while people adjusted to the new normal of working from home, but in China as well as India, this is picking up
- There have been disruptions and delays in the supply chain in the case of design and development for Chip Package and Chip Test from China and Electronics System design and manufacturing in China and India
- The world over, companies will delay planned hardware upgrades and other long-term migration projects
- There will be increased server demands and a strong uptick in video streaming and conferencing as more people work from home Demand for enterprise IT and enterprise cloud solutions is expected to remain stable
- Consumers will upgrade their private IT infrastructure to support their work or home schooling activities
- There will be an increase in video streaming across many networks
- In areas that have not launched 5G networks, telecom providers will postpone investments and focus on improving their existing networks to accommodate rising data traffic instead
In the near-term, semiconductor manufacturers need to do more than merely handle operational challenges during the economic downturn, if they want to emerge stronger post the COVID-19 crisis. To begin with, they must assess the potential risks and vulnerability of today’s electronics and semiconductor value chain model. The semiconductor industry must consider transforming its global supply chain model to ensure fool proof business continuity plans in the future. Many companies have geographically concentrated manufacturing to realize the benefits of favorable incentives, tax structures, low-cost labor, and synergies with both suppliers and customers. In the long-term, these companies should consider examining their supply chain strategy and operating model to address the risks of geographical concentration and lack of resiliency. These companies must develop domestic or alternate self-sufficiency models.
Last year, the vision of National Policy on Electronics 2019 (NPE 2019) was notified on 25 February 2019 to put India as a global hub for Electronics System Design and Manufacturing (ESDM) by promoting and driving capacities in the nation for producing core electronic components, including chipsets, and establishing an ecosystem for the industry to contend globally.
Attracting Investments into India’s Electronic Manufacturing
To attract investments in the space, the Modified Special Incentive Package Scheme (M-SIPS) was announced, give monetary incentives support to counterbalance the high upfront expenses in building electronic component manufacturing units, thereby attracting investments from interested companies.
Now, there is another program to boost investments in the electronic manufacturing sector. Known as Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) introduced in April 2020, the program is aimed to offer monetary stimulus of 25% of capital expenditure for the manufacturing of goods that form the supply chain of electronic goods.
The scheme will balance the lack for domestic manufacturing of components and semiconductors, and aims to grow the electronics manufacturing supply chain ecosystem in India. There are various classes of goods eligible for incentive under SPECS, ranging from a Minimum Investment Threshold Limit of INR 5 crore to Minimum Investment Threshold of INR 1000 crore, including semiconductor wafers and Semiconductor Integrated Chips (ICs).
With the newly announced era of Internet of Things (IoT), directing that the new generation of interconnected devices be capable of advanced computing, the Indian semiconductor industry is set for a solid rise with fresh prospects provided India’s infrastructure and funding issues for electronics chip manufacturing are met.
At the moment, almost all the semiconductor demand is satisfied by imports from nations like the USA, Japan, and Taiwan. In the semiconductor area, India has a large human-capital pool, which is focused on the design side, not manufacturing. Hopefully, this may change in the coming years.