The Electronic industry has experienced an enormous increase in post-pandemic demand for semiconductors across almost every sector, driving utilization rates of existing wafer fabs to between 90% and 100%. With factory utilization exhausted and both work-in-progress and finished goods inventories rebalanced, an increase in capital spending to support market demand was required. As a result, capital expenditure has been trending upwards in 2020, 2021, and 2022, with year-on-year growth of 10%, 35%, and 18% respectively.

Continued Investments in a $600 Billion Global Industry

Recent quarters have been critical from a semiconductor supply perspective and the expansion of capacity to manage the increased demand is welcome. Even with the maturity and scale of the industry, having to make major investment decisions while considering geopolitical issues, trade restrictions, supply chain disruptions, and pandemic-related consumption patterns is proving to be a challenge for an industry that has historically managed industry cycles without this many outside variables. 

To help secure its position in overall semiconductor leadership, the US Government is investing billions to expand semiconductor capacity and build more resilient supply chains by approving the CHIPS and Science Act with over $52B in funds. As a result, the industry will be well funded, and the investment will insure not only additional capacity but also build on research capabilities and improve talent development. Semiconductor manufacturers and Foundries can apply for the CHIPS and Science Act, however, these funds will come with certain restrictions including limitations over foreign investments. It should be noted that both Europe and Japan have implemented similar government-sponsored investment programs to support semiconductor growth regionally. 

Even with the accelerated capital investments, the timeline to see new production capacity benefits will still take at least 24 months, with minimal impact in the short term. As outlined above, the increase in wafer capacity begins in 2023, and even with this incremental increase in capacity factory utilization, will continue to run at high rates.

Where are the Investments Going?

With the combination of public and private funds, it is estimated that the investments in the coming years will rise to $460B cumulatively over the next 3 to 4 years, compared to an average capital investment of around $130B annually, running the risk of contributing to a position of potential oversupply in the future. 

The following charts represent CAPEX for each of the different semiconductor product groups. The total CAPEX in 2022 is forecast to be $156B (Note: Logic includes System on a Chip, SoC devices).

CAPEX funds alone are not enough to drive industry capacity expansion. Typically, it takes around 3 to 5 years to build a state-of-the-art 300mm fab from the ground up, with the most advanced systems to support sub-10nm production. You will note that the increased investments made in 2021 and 2022 only start to increase capacity in 2023.
 

From steppers to lithography, the semiconductor manufacturing equipment segment has its own lead times and technology limitations. Lithography, for example, comes with a structural shortage of 10 out of a total of 50 EUV tools every year. Also, after years of underinvestment, there is now a focus on supporting more mature technology nodes - 200mm wafers and greater than 28nm process nodes – which are used for power applications, including MOSFETs, IGBTs, Silicon Carbide SiC and Gallium Nitride GaN, alongside other analog applications such as Voltage Regulators, Audio/Video processing, OpAmps, DAC’s and ADC’s.  
 

In addition to the physical investment, a portion of the funds being made available from the CHIPS and Science Act will be focused on research and development, advanced technologies (including AI & ML), and education.
 

A Bump in the Road: CAPEX Changes for 2023

In the current global environment, soaring inflation, regional tensions, and trade complications are all contributing to a slowdown in end market demand. Led by reductions in consumer spending and challenges in the PC market, many manufacturers are being forced to revisit their aggressive expansion plans, especially within the memory markets. We have already seen CAPEX plans reduced to support the current demand environment and to ensure organizations avoid a glut of products as the industry normalizes in the back half of 2023 and into 2024. Nevertheless, despite challenging market conditions, global semiconductor capital spending is forecast to reach a record high of approximately $160B in 2022. 
 

US sanctions on exporting semiconductor manufacturing equipment to China shows no signs of abatement and will also contribute to a cooling down of investment in 2023 – forecast to drop 10 – 15% year-on-year.
 

Regional CAPEX Planned Investments

CAPEX will take a step up and increase in North America from 2021 onwards. Taiwan, led by TSMC, remains the powerhouse for advanced technologies. South Korea is dominant in the memory market. China follows a modest growth trajectory. CAPEX for Memory drives the most advanced process nodes and is typically between 40-50% of total spend.
 

Regional CAPEX Investments in $Billions (Past & Planned)

Source: Omdia Research

 

Final Observations

The current market challenges are likely to persist in the short to medium term across some critical technologies (Analog, Microcontrollers, and FPGAs) while the industry continues to deal with the supply/demand imbalance and inventory rebalancing.
 

Strategic demand will be driven by the ubiquitous consumption of semiconductors in automotive applications, alternative energy solutions, hyperscale data centers, IoT, communications, and medical and industrial solutions.  These driving forces will ensure that the long-term planned investments for the industry will create enough technology and manufacturing capacity to support overall market growth.
 

The projected investment will be adjusted over the next few quarters and years to address critical shortages and will be followed by more strategic investments in the future. We will observe a dual semiconductor market demand with significant changes between consumer-driven markets and enterprise-driven markets. It is very good to see that this commitment to change in the semiconductor supply chain is real, however, for the industry, it will continue to be an uncertain and bumpy road ahead.

Please do not hesitate to contact me (rudi_palmans@jabil.com) with any questions or  for more information.