The Semiconductor Industry’s Biggest Challenges in 2023

After two years of record-breaking growth, 2023 is set to be a more challenging year for the semiconductor industry.
 
The ups and downs of the semiconductor industry have only recently become of widespread concern. The challenges faced by chip manufacturers and their supply chain were unlikely to cause too much of a stir prior to the COVID-19 pandemic. But when a shortage of the components started to impact car and smartphone production, and the availability of products including home appliances, more people started to take notice.
 
Now, as economies around the world continue their recovery from the pandemic the semiconductor industry must find its way back to normality as well. Here are five key factors that will help to determine how long and winding that road is.
 
1. Declining revenue
 
Firms have just recorded their best year ever, reaching $595.7 billion in revenue in 2022. But the numbers only tell part of the story. The market declined in all four quarters, according to Omdia’s latest research. In the final three months, revenue dropped 9% to $132.4 billion – just 82% of the record quarterly revenue of $161.1 billion a year earlier. 

For many, the decline doesn’t come as a surprise. The pandemic accelerated the demand for electronics products but that also caused supply problems. Now, increasing instability around the world and rising political tensions are adding to the uncertainty. This perfect storm means people have stopped buying and companies are reigning in their budgets due to concerns about what comes next. 
 
The challenges of operating in this post-pandemic environment are expected to continue in 2023. Semiconductor revenue is forecast to fall 8% year-on-year.
 
2. Reduced capital expenditure
 
Semiconductor firms’ capital expenditure (CAPEX) is also expected to reduce in line with the drop in revenue and increase in uncertainty. In 2022, CAPEX was at its highest level since we began tracking the data two decades ago. Companies had invested in new facilities and equipment to meet the demand for products. CAPEX as a proportion of revenue was at 24.9%.
 
The average rate of expenditure in the semiconductor market has been 19.4% for most of the past 20 years. The exception was during the pandemic, and before that, during the financial crisis that began in 2008. Then, CAPEX dropped sharply to an average of 16.7% but increased when rapid developments in technology exposed the underinvestment. 

The close relationship between revenue and CAPEX means that as revenue declines in 2023 a lower percentage of it will be spent on increasing capacity. We expect the average spend to reduce to 20% or below.
 
3. A drop in the price of components
 
In the second half of 2022, the price of key components including processors and memories dropped sharply. For example, dynamic random-access memory (DRAM) has declined by 40% in just the past four months. We expect price erosion to affect other semiconductor product categories in 2023. However, firms should note this is a cyclical industry, which means the market will bounce back. 
 
4. Companies trying to stimulate demand
 
To counteract the decline in customers’ spending, companies may take matters into their own hands to stimulate demand for their products. Earlier this year, electric vehicle (EV) manufacturer Tesla began cutting the prices of its cars – some by up to 20%. Ford has also reduced the cost of its all-electric Mustang Mach-E vehicles in the United States. Cars, and EVs in particular, are an increasingly important segment for semiconductor firms because of the electrification and electronification of vehicles.
 
We’re looking closely at what may happen in other segments this year. Segments that could significantly and positively impact the semiconductor market include smartphones. They’ve been the largest driver of demand in recent years because of the number of components required for each device. If the market recovered significantly it could be a game changer for semiconductor firms. 
 
We’re also watching the data center and PC markets for improvements.
 
5. Countries boosting their economies with the help of incentives
 
The most significant driver of demand will be any action taken by countries to speed-up their recovery from the pandemic. Late last year, China began reopening to the world after one of the world’s harshest lockdowns and is now rebuilding its economy.
 
Governments around the world are also giving their semiconductor industries a boost, although for different reasons. The Biden-Harris Administration is providing more than $50 billion of support for semiconductor research and development, manufacturing and workforce development. The European Union is taking similar steps through its European Chips Act, and Taiwan and Japan have introduced their own support packages.

 
For more information, analysis and insights read our Semiconductor Dynamics report.