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Chips on the rebound

Chips on the rebound

11 Nov 2023

The semiconductor industry is making a comeback, with demand growing on the back of technological advancements.

THE semiconductor industry in Malaysia has emerged as a vital and rapidly growing sector of the economy, playing a pivotal role in the development of the nation.

Over the past few decades, Malaysia has strategically positioned itself as a hub for semiconductor manufacturing and innovation, while becoming one of the most prominent players in the global landscape.

Things were going well, from the beginning of April 2020 where the demand for semiconductor chips used in tablets, laptops and smartphones surged massively because people were staying home due to lockdowns and travel restrictions.

What further drove the market at this time was the gaining popularity of electric vehicles (EVS), artificial intelligence (AI) and the fifth-generation (5G) network, all of which required some form of chips.

Then in May 2022, a declining trend had emerged, as industry players began reporting downturns in their financials and a lowered forecast in sales and distributions.

This continued right through to 2023 due to greater economic ambiguity, high inflation and borrowing costs as well as a slowdown in demand worldwide.

According to the Semiconductor Equipment and Materials International Association’s (SEMI) Market Outlook, integrated circuits (IC) sales for the first half of 2023 decreased 25% year-on-year (y-oy) as memory sales plummeted more than 50%.

Capital expenditure for semiconductor fell 5% y-o-y in the second quarter of this year and is expected to further tumble 15% y-o-y in the third quarter of 2023.

However, not all hope is lost for the industry, as 2024 is the year experts and industry players believe will make a comeback.

In fact, the semiconductor market is expected to grow at a compounded annual growth rate of 10% from 2023 to reach US$1 trillion by 2030, according to SEMI.

“We think data creation will be the key driver accelerating the growth. We live in a world that is shaped by big data, 5G and 6G, artificial intelligence and Internet of Things.” Vittorio Villari

Better times ahead

AT&S Malaysia managing director Vittorio Villari told Starbizweek that after a downcycle in 2023, the industry expects a growth phase at the start of 2024.

Villari says while he does not expect sales to reach high numbers quickly, the decline within the industry has stopped and is moving into an ordinary pattern once again.

“Automotive is currently a strong driver for electrification, while notebooks and computers have been an extreme outlier for the last two and a half years.

“The server market was weaker than expected in the beginning of the year but is projected to recover next year,” he says.

For servers and edge computing, a strong push for AI was recorded, creating short-term winners while sending signals that the market will benefit from these trends in a wider and more sustainable way, moving forward.

Villari says research firm Gartner has projected the semiconductor industry will grow by 17% next year after a decline of 11% in 2023, while until 2026, the compound annual growth rate is estimated to be 13%.

“Our views are aligned with this, and we think data creation will be the key driver accelerating the growth. We live in a world that is shaped by big data, 5G and 6G, AI and Internet of Things.

“With these, the data volume is expected to increase by nearly three times in the next three years. The next big trend is electrification, which is mostly prominent in automotive but generally happens all around us,” he explains.

On mitigation steps in facing challenges next year, Villari says every industry player has been set up differently, and thus copes with situations differently too.

“We were coming from a fast growth path into the current situation. Hence, we implemented cost optimisation programmes and re-evaluated the ongoing projects.

“As a result, we are continuing investments to be ready for the expected upturn and next generation of electronics,” he says.

The Austrian manufacturer of high-end printed circuit board and IC substrates currently has a global presence in Austria, India, China, South Korea and Malaysia.

AT&S industrialises technologies for its core business segments that consists of mobile devices, automotive and medical, to name a few.

The group recently announced that it will provide IC substrates for AMD and is currently preparing a significant expansion of capacity for AMD at its new plant in Kulim, Kedah.

AT&S chief executive officer Andreas Gerstenmayer said the demand for central processing units and graphic processing units for data centres is expected to continue growing healthily in the next couple of years.

“We are already working on new technologies for substrates that will allow our customers to integrate a high number of chips into very fast and efficient packaged systems that will help to analyse and transmit data in the cloud fast and reliably,” he said in a statement.

The group added that the last few years proved the importance of the semiconductor industry globally, as well as how critical it was to have a strong and geographically diverse supply chain.

Across the industry, sentiments are alike, all with the same hope that a resilient recovery is on its way.

Segments will turn around at different pace

Malaysia Semiconductor Industry Association vice-president Datuk Lim Yong Jin says that for this year, he expects a reduction of 12% to 13% y-o-y overall for the industry globally.

But, different segments are reducing at different levels, he says.

“For example, one of the worst segments this year is memory, down by 50% in sales. On the other hand, for the automotive and especially the AI segments, 2023 was a tremendous growth year for them.

“All the other segments are generally down and this current semiconductor downturn is the worst in the last decade,” he says.

However, he says that for 2024, the sector is forecast to grow at between 14% and 15%, as inventories have stabilised with the highest growth coming from AI as the main driver.

“Automotive will likely see a down year as EV is not seeing the tremendous growth of the recent years. Memory will climb from the trough although it is not as high as 2022,” he says.

He adds that 2025 will be another growth year and it is forecast to come between 12% and 13%, amounting to Us$670bil.

According to Lim, inventory correction is almost sorted and next year’s growth is expected to be broad based.

“Demand for AI is there, memory will come off the bottom, while EV and advanced driver assistance system will be strong enough based on their recent highs.

“Another segment is auto high-performance computing, which is expected to grow at a high percentage but start from a lower base,” he says.

He notes that industry players, however, are aware of the cyclical nature of the business, and therefore have been trying for decades to predict this boom-and-bust cycle with limited success.

“For this cycle, it was pandemic driven whereby the work-fromhome, remote working had occurred, and much more money was diverted into the electronic sector, driving tremendous demand.

“To make matters worse, when the pandemic set in, a lot of chip users deferred or outright cancelled their demand. When the drop in demand didn’t happen, chip demand soared through the roof and the pressure to invest heavily occurred.

“In the end, it was the over-investment here that drove the ‘bust’ cycle,” he explains.

Despite global semiconductor shipment revenue projected to be down 12% to 13% this year, Lim says Malaysia is expected to be down by only 2%, so this was weathered quite well.

Lim cautions, however, that these projections were subject to exclusions from any deep recession in Europe, the United States or any unforeseeable black swan event.

Significance of the sector

Lim says the sector is a very important part of Malaysia’s economy, even back when it first began flourishing in the 1970’s.

“If we look at the sector in Malaysia through the lens of history, the electrical and electronics

(E&E) sector began in 1971 when the seven ‘Samurais’ entered Penang and the Klang Valley.

“Exports in 1972 was Rm230mil, with employment at around 10,000 people. In 2022, 50 years later, exports reached almost Rm600bil.

“This is a fantastic improvement and this really puts Malaysia on the world stage in this future-defining sector,” he says.

In 2022, the E&E sector contributed 38% of the country’s total exports, also becoming the largest sector to do this.

Lim says while there is a tendency that the value-add in this sector is small, in terms of percentage it stands correct.

“We tend to focus on assembly, test and packaging, making it really important for Malaysia’s trade surplus.

“In 2022, Malaysia’s external trade surplus amounted to Rm255bil, of which Rm199bil came from our E&E sector. This is 78% of the total surplus and it is no small thing,” he notes.

Additionally, Villari says the sector plays a huge role in terms of employment and finding talent.

“In terms of jobs, the E&E industry hires more than 600,000 people and this job creation aspect will further escalate the economic growth, which is an aspect that the Malaysian government is now working on through the Malaysian Industrial Master Plan 2030,” he says.

During the recent Budget 2024 announcement, Prime Minister Datuk Seri Anwar Ibrahim said his government was committed to fostering economic growth and ensuring social welfare.

TA Research says this commitment included the opening of a high-tech industrial area in Kerian, Perak, that is expected to bode well for the E&E industry’s long-term prospects.

“The northern region’s attractiveness, among others, is attributed to its established E&E ecosystem and the availability of skilled labour,” it says.

TA Research adds that the local E&E industry will also be able to capitalise on ongoing interest from foreign manufacturers adopting a China Plus One strategy.

“We expect their potential entry to have positive spillover effects on local E&E players, including those involved in outsourced semiconductor, assembly, and test, automated test equipment, factory automation solutions, and electronics manufacturing services,” it notes.

Crucial advantage

According to SEMI, Malaysia maintains a crucial advantage in semiconductor manufacturing, noting that the country has successfully attracted significant foreign direct investments (FDIS) in recent years, especially in the E&E sector.

This is mainly attributable to the various incentives that the government has put in place to encourage FDIS, a good ecosystem support within the economy and the country’s skilled workforce.

SEMI expects Malaysia to play an increasingly significant role in the semiconductor industry, as it benefits from supply chain diversification, particularly through the China-plus-one and Taiwanplus-one strategies.

Meanwhile, founder of icapital Bhd Tan Teng Boo says the semiconductor industry plays such a vital role in Malaysia’s economy that whenever the global condition goes up, exports for the country also goes up simultaneously.

“Our economy is very connected to the global semiconductor sales, and of all the industries in the world, the one that has the most promising future is semiconductor,” he says.

Tan says whether it is for EV’S, smartphones, data centres or others, the role of semiconductors is as a crucial component.

“It is what is going to drive global growth, and Malaysia is tied closely to this,” he says.

On the ongoing Us-china trade tensions, Tan says Asean has been smart in playing the neutral party, resulting in investors diversifying operations and moving to this region.

“We can capture these opportunities that the Us-china tensions are creating for us. Malaysia is a favourite investment destination for these companies.

“If the US economy goes into a recession next year, US demand for semiconductor will undoubtedly go down, but this will be offset by the potential increase in demand from China semiconductor companies in tandem with the expected recovery of the latter’s economy next year.

“For stock investment, investors have to be selective. Some companies will benefit from China’s recovery but some others will be affected by the anticipated US downturn,” he says.

Source: The Star