29 Mar 2023
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The semiconductors industry is the backbone of modern technology, yet it is often overlooked. Sentadell Associates aims to shine a light on this vital industry by offering valuable insights, thoughtful perspectives, and comprehensive analysis. In this article, we will delve into the various aspects of this technology ecosystem, including its complex supply chain. Join us as we embark on a journey to uncover the mysteries of this essential yet often underappreciated industry.
Semiconductor refers to a material that possesses electrical conductivity characteristics that are between that of a conductor and an insulator, and is commonly found in crystal form. This type of material is utilized in the creation of electronic devices such as transistors, diodes, and integrated circuits, which are essential components in various electronic devices, including smartphones, televisions, and computers. The ability to manipulate the flow of electrical current in semiconductors makes them indispensable in the production of electronic components and circuits. The semiconductor industry involves companies that manufacture chips and components for a range of devices, including smartphones, computers, and vehicles. Its complex manufacturing process makes it highly cyclical and reliant on commodity prices for materials such as silicon, palladium, and germanium. With the technological revolution driving growth, the semiconductor industry plays a crucial role in producing microchips for various devices.
Sentadell Associates' data analysis highlights the various countries that act as suppliers for the raw materials essential to semiconductor manufacturing. Specifically, the data shows that China leads the way in producing Gallium, with other critical materials including Silicon, Germanium, Copper, Tin, Lead, and Zinc sourced from multiple countries.
There are several factors that are affecting the semiconductor industry at present. These include rising interest rates, high inflation, lower consumer confidence, and a retreat in the tech-led stock market, which has resulted in a significant decrease in the combined market capitalization of top 10 global chip companies, such as Samsung, Intel, Qualcomm, Micron Technology, and others. The market capitalization has dropped by 34%, from USD$2.9 trillion in November 2021 to USD$1.9 trillion in November 2022. However, there is some positive news in terms of revenue, as Intel and Samsung Electronics were among the largest semiconductor companies in terms of industrial revenues in 2022. Intel generated US$58.4 billion, while Samsung Electronics generated US$65.6 billion in semiconductor revenue. The Philadelphia Semiconductor index experienced a decline of 45% at one point in October 2022 since January and finished the year with a decrease of 37%. The semiconductor market is expected to decline in 2023, but the extent of the decline will depend on two critical factors: the duration it takes for the inventories to realign and the overall demand for electronic equipment. In summary, the semiconductor industry is experiencing a decline in growth based on the information presented above.
Moving on further, how do the flow and supply chain conditions look for this industry amidst declining growth and positive projections for 2023? Looking back at the situation during and after the war, the conflict in Ukraine caused disruptions to supply chains, hindered access to critical raw materials, and caused fluctuations in energy prices around the world, especially in Europe.
Upon examining the potential supply chain risks, it becomes evident that a correlation exists between the semiconductor industry and the supply chain originating from Russia. Given Russia's position as the second-largest producer of palladium and the third-largest producer of oil globally, the ongoing war and the sanctions imposed on Russia by several nations will likely cause disruptions to the supply chain of palladium and oil. It is important to bear in mind that palladium is also among the materials used in the production of semiconductors. With a mine production of around 88 metric tons, Russia was the top producer of palladium worldwide in 2022. During that year, the average price of palladium was $2,178 per ounce. Therefore such disturbances to the palladium supply chain and delays in the transfer of its raw materials are likely to result in disruptions to the semiconductor supply chain, eventually impacting semiconductor companies' production globally. It is also noteworthy that Ukraine plays a role in chip production by also supplying neon gas as a crucial raw material.
Despite the ongoing conflict in Russia, the semiconductor supply chain in Asia remains a topic of debate and discussion. These matters are focused on developing the industry in Asia and take into account the region's specific conditions and challenges. The majority of semiconductor fabs are located in Taiwan, mainland China, and South Korea, with production lead times ranging from 20 to 60 days depending on the plant and integrated circuit complexity. Assembly and testing facilities are mainly based in Asia, and it can take up to 40 days to produce various components before building finished products. Taiwan's TSMC produces over 90% of the most advanced chips globally, South Korea leads in export revenue, and China dominates in terms of overall production and export volume. Meanwhile, emerging markets in Southeast Asia, such as Indonesia, Malaysia, the Philippines, Thailand, and Vietnam, are looking to utilize the CHIPS Act to expand their semiconductor industries and seize a greater portion of the Asia-Pacific market, which accounts for roughly 60% of global semiconductor sales. This approach aims to challenge China's regional dominance and spur economic growth. Numerous obstacles have arisen in the supply chain, originating from the Covid-19 pandemic's aftermath. Shortages in supplies have been one such problem, particularly in the US, which has had a strong supply reliance on Asian countries. Additionally, diplomatic challenges have further complicated supply chain management.
The semiconductor industry is a vital backbone of modern technology, and understanding its complexities and supply chain risks is crucial for its sustainability and growth of modern technology industry. Despite the challenges it faces, the industry continues to evolve and adapt, driven by the technological revolution and demand for electronic devices. As the industry navigates through the ongoing pandemic and geopolitical tensions, it is essential to prioritize supply chain resilience and explore opportunities for expansion and innovation. By doing so, the industry can continue to play a crucial role in shaping the future of technology and society.
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