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2024 semiconductor industry outlook

Trends and predictions for a cyclical industry

Led by generative AI, chip sales look to bounce back in 2024—but geopolitics could complicate growth in the semiconductor industry. Learn more about trends and predictions for the year ahead in our 2024 semiconductor industry outlook.

Chip sales look to bounce back in 2024

The infamously cyclical semiconductor industry had a challenging year in 2023, the seventh downturn since 1990, with sales expected to be down 9.4% (to US$520 billion) for the year. But that’s not as bad as was expected in the spring; before a relatively stronger second and third quarters were in the books, the previous forecast had been for US$515 billion. 2024 is now predicted to see global sales of US$588 billion. Not only would that be 13% better than 2023, but it’s 2.5% higher than 2022’s record industry revenues of US$574 billion.

As is so often the case, the memory chip market was the biggest swing factor. In 2022, memory sales were almost US$130 billion or just under 23% of the overall chip market, but they dropped 31% (about US$40 billion) in 2023. The market is expected to get almost all of that back in 2024, with sales expected to reach 2022 levels. If we exclude memory, the rest of the industry was down in 2023, but only by about 3%.

In terms of end markets, both PC and smartphone sales are expected to grow 4% in 2024, after 2023 declines of 14% and 3.5%, respectively. Returning to growth for these two end markets is likely important for the semiconductor industry: In 2022, communication and computer chip sales (which include data centre chips) made up 56% of overall semiconductor sales for the year.

Two other important measures of the industry’s health are inventories and fab utilisation. As of fall 2023, inventories remained high at more than $60 billion, about the same level as the previous year. And the process of drawing those down will be a significant headwind for sales in the first half of 2024. In addition, utilisation was high during the recent shortage (in the mid-90% range) and is expected to fall below 70% in Q4 2023. The industry likely needs utilisation to be much higher than that to be profitable, which could take some time.

In our 2024 semiconductor industry outlook, we drill down into five big topics for the year ahead:

  1. Generative AI accelerator chips and how semiconductor companies are using gen AI
  2. Trends around smart manufacturing
  3. The need for more assembly and test capacity worldwide
  4. How chip industry IP is a target for cyberattacks at a whole new threat level
  5. And a final geopolitics section that looks at export controls around advanced node manufacturing equipment and technologies, as well as advanced gen AI semiconductors

Download the full report to learn more about the impacts of semiconductor industry trends, key actions to take and critical questions to ask.

A closer look at this year’s trends

The market for chips that accelerate the training and inference of generative AI models was the semiconductor story of 2023. For an industry fighting headwinds from weak memory prices and weak demand for smartphone and computer chips, gen AI chips provided a growth area, especially at leading manufacturing nodes. As we enter 2024, the market for these chips looks to be strong and is predicted to reach more than US$50 billion in sales for the year or 8.5% of the value of all chips expected to be sold for the year.

In the longer term, there are forecasts suggesting that AI chips (mainly gen AI chips) could reach US$400 billion in sales by 2027. But what will happen in 2024? On the one hand, Deloitte predicted in November 2023 that gen AI chip sales will be more than US$50 billion in 2024. On the other, there are reasons to believe quarterly gen AI chip sales growth could flatten or even decline at some point, at least for a while.

The chip industry has been using AI tools to help design chips for a couple of years and there are still challenges to overcome. Building or buying customised models can be cost prohibitive as compared to manual execution. Gen AI can create inaccurate or nonsensical outputs, so humans need to be kept in the loop for validation to improve accuracy. And when working with human-centred applications such as HR or sales and marketing, human review can help to ensure that all data is sanitised, personally identifiable information (PII) removed, guardrails installed and validation performed.

Strategic questions to consider:

  • As gen AI chipmaking capacity increases, will prices and volumes continue to increase or come down? What early signals should be paid attention to from across the chip supply chain, such as movements in channel inventories or order buildups at hyperscalers?
  • Many chip segments are dominated by a single player, whose pre-eminent role is both strong benchmark performance and a set of tools and support systems that lock buyers in. Will gen AI chips follow that trend or will we see a more fragmented industry?
  • Gen AI tools may transform the industry, but what will the effects be? Will they just lower costs or will we actually see revenue growth?

Over the years, semiconductor fab facilities and outsource semiconductor test and assembly facilities (OSATs) have leveraged IoT devices, robotics tech and artificial intelligence/machine learning (AI/ML) and analytics with the goal of achieving smart, lights-out chip factories that are fully automated. Wafer fab equipment makers, integrated device manufacturers (IDMs), foundries and back-end assembly and test (AT) facilities all continue to invest more in smart manufacturing practices, digital tools and technologies, but the basic smart manufacturing objectives more or less remain the same. However, from a chip manufacturing perspective, two things are expected to be different for smart manufacturing in the semiconductor industry in 2024.

One is the availability of sophisticated and highly advanced AI tools (including gen AI) to analyse large datasets and offer sharp insights. Across manufacturing, operations and maintenance functions, semi execs believe gen AI has the potential to add the greatest value through analyses and insights pertaining to processes and equipment, followed by predictive maintenance and smart diagnostics and troubleshooting.

The second relates to enhancing performance and sustainability of fabs and buildings. The semiconductor industry should consider implementing manufacturing transformation on older plants (brownfields), in addition to building brand-new greenfield plants, to help realise even greater sustainability benefits. Moreover, fabs can look at investing in smart manufacturing tools such as 6D BIM (building information modelling) to help improve cost management, simulate and analyse energy consumption, enhance efficiency and streamline facility management.

Strategic questions to consider:

  • As part of a digital vision, what aspects should be considered by an enterprise—including design, production, sales, support and product end-of-life/recycling—to make it a holistic digital approach?
  • To make the variety of manufacturing equipment, machinery and tools in the facilities talk to each other and benefit from the broader data modernisation efforts across the other business units, what other line-of-business applications should the production systems and processes be integrated with? What communication protocols should be standardised? And what interface programmes should be developed?
  • In view of the goal to be lights-out, how can the next-generation smart factory implementation be more human-centric and what specific aspects of manufacturing processes should have human workers doing the job with machines?

More than 75% of the global semiconductor fab capacity is in Asia (the front end), but the region’s market share is even higher (90%) in chip assembly and testing (the back end). Except for large IDMs, most chip players have been outsourcing AT processes to third-party vendors or OSATs. The majority of the big OSATs are based in China and Taiwan, commanding roughly 80% of the OSAT market share in 2022. Although the United States is aiming to bolster domestic AT capacity, almost all actual AT work is done in Asia. The lines between traditional front-end and back-end manufacturing are increasingly blurring, with each attempting to capture more of the value chain. Advanced packaging is also increasingly becoming a strategic enabler to build the most sophisticated leading-edge chips.

Going forward, as the United States and Europe look to expand domestic chip fabrication capacity, they should build up their back-end capacity to avoid lengthening timelines and making their supply chains more complex. To help stay on the leading edge of product performance and flexibility, IDMs in the United States and South Korea are increasing efforts to bolster their packaging capabilities, which are usually provided and enabled by their respective assembly operations and facilities. Concurrently, leading fabless companies are pushing for nearshore AT. Further, complex gen AI chips are fuelling demand for advanced packaging, exposing an acute capacity shortage for this technology.

To stay competitive in the dynamic AT landscape throughout 2024 and beyond, OSATs and captive AT facilities should strengthen their core enterprise IT systems. Additionally, integrating AI and ML into their operations can help to develop advanced packaging technologies and features, improve demand planning, manage inventory effectively and streamline information flow across the extended supply chain. Testing is also expected to gain prominence, as complex chip and module designs could require captive AT and OSATs to advance capabilities like system-level test, adaptive or dynamic test and AI/ML-based bin prediction.

Strategic questions to consider:

  • Which peer companies and academic institutions should companies partner with to take advantage of government incentives and shared research infrastructure to collaboratively build, test and pilot next-generation innovative packaging approaches?
  • What parts of AT processes should be reshored domestically, which ones should be outsourced and what countries (within Southeast Asia, South Asia, Eastern Europe, Latin America) should be considered to build new back-end facilities?
  • In back-end assembly, how should metals, plastics and other materials be handled as part of broader sustainability efforts and to comply with ESG regulatory needs?
  • Should more foundries and IDMs integrate packaging into their value chain? Will the increased strategic relevance of packaging manifest itself through new alliances and partnerships that fabless and IDMs could consider?

Semiconductor companies face a heightened level of cyberthreats compared to other industries. In addition to the usual profit-seeking ransomware attacks that every industry deals with, semi companies possess unique, valuable and restricted intellectual property (IP). Due to the increasing importance of semiconductors for multiple industries, it’s often targeted by state-backed actors.

If geopolitical tensions continue to escalate in 2024—resulting in further restrictions around IP, chips and raw materials—cyberattacks may intensify, disrupting production in the industry. Cyberthreat actors are not only targeting the core semi companies, but attacks are increasingly directed at extended channel partners too. Sophisticated threat actors could use advanced methods, like masking as ransomware groups, to fabricate attacks and cause business disruptions across the supply chain.

Here’s where the semiconductor industry could experience an asymmetric battle in 2024: The industry may need to face off with sophisticated threat actors that have much more advanced resources than other industrial cyberthreats. This asymmetric battle between state-backed actors and broader semiconductor industry participants could present new challenges to industry executives in 2024 and beyond. Therefore, semi companies should consider accelerating their efforts to bolster cyber defence capabilities of their own as well as the digital and cyber infrastructure of their extended supply chains.

Strategic questions to consider:

  • Given the regional differences in cybersecurity threats and incidents, what strategies will help to improve resilience and enable digital trust for organisations and suppliers globally? How can companies tailor strategies that best address cybersecurity needs and threat vectors that are specific to each of the regions in which they operate?
  • What types of distinct methods should be considered when compartmentalising IP and crown jewels using security systems and access management?
  • What holistic skills and capabilities—such as cyber forensics, cryptography, AI/deep learning, DevSecOps—do companies need in order to develop a robust organisation-wide cybersecurity programme?

In recent years, US policymakers have enacted export controls on various types of semiconductors and semiconductor manufacturing technologies to China, many of which are restricted because policymakers argue that they have a military application. A handful of other countries have enacted similar restrictions with respect to China. What was relatively new in 2022-23 and may be increasingly important in 2024, is the perception around two key semiconductor technologies: advanced node manufacturing itself and chips that accelerate AI. Both of these technologies were restricted to some extent in 2022, with restrictions tightening further in October 2023.

We expect that 2024 will see the ramifications of those restrictions, as well as possible further restrictions. Companies are expected to try to balance making sales while still complying with ever-evolving restrictions, possible counter-restrictions and new developments in domestic advanced node capability in the countries affected by these restrictions. They should not only comply with the current situation, but increasingly plan for or attempt to anticipate future rules and restrictions.

Strategic questions to consider:

  • Can countries under export restrictions on deep ultraviolet (DUV) and extreme ultraviolet (EUV) technology develop their own DUV and EUV solutions? If not, if they make advanced chips using DUV-based techniques, can they do so economically?
  • Will restrictions on the export of gen AI chips themselves continue to tighten? How will this affect chip company revenues and growth?
  • Will these restrictions lead to responses from restricted countries that could adversely affect companies, industries and the global economy?

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