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2022 semiconductor industry outlook

Analyzing key trends and strategic opportunities

Although it took recent chip shortages to cement their “critical” status, semiconductors have now established their place as a truly essential industry. So what’s next? Our 2022 semiconductor outlook takes a closer look at four key trends expected to shape the industry in the year ahead.

Entering a period of robust growth

In 2022, the global semiconductor chip industry is expected to reach about US$600 billion. But while it’s still dwarfed by farming, oil, and gas—industries that are worth an annual US$10 trillion and US$5 trillion in revenue respectively—80% of the world’s food or fuel doesn’t come from a handful of manufacturers concentrated in a just a few countries.

Across multiple end markets, the absence of a single critical chip, often costing less than a dollar, can prevent the sale of a device worth tens of thousands of dollars. Based on our analysis, the chip shortage of the past two years resulted in revenue misses of more than US$500 billion worldwide between the semiconductor and its customer industries, with lost auto sales of more than US$210 billion in 2021 alone.

Over the long run, semiconductor revenues are likely to oscillate around a trend line. Still, that trend line looks steeper than ever before as we enter a period of robust secular growth.

  • We expect the global industry to grow 10% in 2022 to over US$600 billion for the first time ever. Chips will be even more important across all industries, driven by increasing semiconductor content in everything from cars to appliances to factories, in addition to the usual suspects—computers, data centers, and phones.
  • We expect shortages and supply chain issues to remain front and center for the first half of the year, hopefully easing by the back half, but with longer lead times for some components stretching into 2023, possibly well into 2023.
  • The ongoing talent shortage will be made even more severe by the addition of increased semiconductor manufacturing facilities outside Taiwan, China, and South Korea. The higher demand for software skills required to program and integrate chips into fast-growing markets will further exacerbate the shortage.
  • Finally, we expect the digital transformation within the industry to continue and accelerate. Nearly three out of five chip companies have already begun their transformation journey. Still, over half of those are modifying their transformation process as they go, in response to various pressures.

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

The top semiconductor issue of 2020 was the imbalance between supply and demand. This imbalance led to chip shortages that affected both traditional chip end markets, such as data centers and smartphones, and traditionally less dependent markets, such as automotive, consumer white goods, and—rather infamously—dog-washing machines.

If you guessed that supply and demand will also be top issue of 2022, you’re likely to be right. However, next year will not be an identical repeat of 2021. In contrast, we expect the severity and duration of the chip shortage, and its economic ramifications, to be less pronounced because of increased capacity, but also from supply chain improvements that chipmakers, distributors, and end customers make.

To find their footing in 2022, semi companies should move to a digital capabilities model, and should redesign their traditional organizational silos to create a more connected and integrated model—one that encompasses their customers, talent, suppliers across all tiers, channel partners, and internal facilities. They should also work to adopt better customer connections, synchronized planning, dynamic fulfillment, supplier collaboration, operations command centers, and digital development.

Strategic questions to consider:

  • How can C-level executives balance their actions and investments that they are making toward alleviating or expediting shortages in the short term versus longer-term fixes to capacity and supply chain?
  • How can a better view of true aggregated demand forecast be developed realistically (e.g., by filtering out double/triple-counting, over optimism), while gaining insight into the real supply capacity investment needed?
  • How can the changing nature of demand from core devices to edge/IoT/5G-enabled devices be addressed? This shift to the edge is changing the ecosystems, products, and routes to market that semiconductor companies have to operate in, and there are big operating model, partnership/channel, and product strategy decisions they should make.
  • How can a better end-to-end, multi-enterprise view of the supply chain be built by considering vital aspects related to data sharing, privacy, security, and confidentiality?

A widespread post-pandemic worker shortage prevails, propelled in part by the “Great Resignation,” in which more than 4 million American workers quit their jobs in August 2021 alone.

The semiconductor industry is also feeling the pinch, albeit exponentially worse. In addition to sharing the factors affecting other industries, the chip business has four megatrends that are making the war for talent even more severe:

  1. Global semiconductor industry revenues by the end of 2022 will be almost 50% higher than at the end of 2019.
  2. There were already talent shortages in Taiwan and South Korea in 2017. The talent pool in those areas was relatively well developed, but recent growth has nearly exhausted it.
  3. Over time, building more local chip fabrication plants (aka fabs) in the US, China, Singapore, Israel, and other countries will allow chip companies to access a broader, deeper pool of talent. In the short term, although there are millions of talented workers in those areas, they must be trained to acquire essential skills—a necessary step will not be resolved in 2022.
  4. The mix of job skills is changing, and the industry has a strong need for software skills. Our analysis of multiple industry estimates suggests that global electronic design automation (EDA) software revenue is anticipated to double from approximately $10 billion in 2020 to $19 billion by 2027. The need for software hires is likely to follow a similar trend.

To cater to the growing hybrid work model, semi companies need innovative ways to help enable collaboration between core manufacturing, technical, and R&D staff. Major chip manufacturers also enhanced their work/life balance initiatives, employee assistance, and well-being programs to better support their organizations during the pandemic. 2022 will likely require them to be even more agile with their workforce development and employee benefit programs, both of which will prove crucial to their ability to retain and grow talent.

Strategic questions to consider:

  • As companies adopt alternative talent strategies to cater to a distributed workforce, what local- and state-level tax policies should be considered, and what specific roles should be permanent or full-time versus contract-based?
  • How can companies develop and train their talent pool in a hybrid work model by leveraging a banquet of options such as on-the-job training, self-paced learning, and onsite/offsite mentorship?
  • What specific tasks can be automated or robotized within each job role? How can companies enhance the human-machine connection, such as using augmented reality (AR), virtual reality (VR), mixed reality (MR), or AI for more effective teaming and productivity?

The global semiconductor industry is committing to increasing its overall output capacity at an unprecedented level. Capital expenditures from the three largest players will likely exceed $200 billion from 2021 to 2023. Governments have committed hundreds of billions of dollars more. We expect global wafer starts to be fully 50% higher by the end of 2023 than they were in 2020. Some will occur in traditional manufacturing clusters located in Taiwan and South Korea; but increasingly, it will be in the United States, China, Japan, Singapore, Israel, and Europe—a trend known as “localization”—increasing chip production closer to the next step in the supply chain.

There are multiple drivers for localization; although, it is worth noting that it reverses a multi-decade trend to a well-developed and fine-tuned global supply chain. From chip design and wafer manufacturing, to packaging, testing, original equipment manufacturer (OEM) assembly, and more, there are dozens of countries involved.

Strategic questions to consider:

  • As companies pursue localization, what changes should they make in the near and long term with regards to manufacturing and supply-side capacity footprint?
  • While companies intend to localize chip production, what potential sources of investments can they tap into—including national, local, and strategic partners?
  • How might access to talent markets, support for technical services, energy and water availability, and tax structure and policies change and affect the long-term expansion strategy and road map?

If semiconductor companies are to strengthen their competitive edge, they should be the first to launch new products, rapidly scale production, and focus on innovation and efficiency. These factors—coupled with the advent of new technology end markets, customers’ shift to design chips in-house, global trade wars, and the supply chain disruption during the pandemic—have forced them to reinvent their business and operating models.

In 2022, chip industry executives should address the fallouts of a complex and unpredictable market environment that has affected their business functions and supply chains. They should establish a clear end-state vision, versus being hasty when planning and formulating a transformation strategy. As digital business model transformations require changing operating models and adopting new digital and talent capabilities, chip companies should take an integrated approach—considering various entities both within and outside the enterprise—to be more resilient to future business disruptions.

Strategic questions to consider:

  • Does the transformation strategy consider all the various entities including technology, workforce, business functions including strategic business units, channel and distribution partners, and end-market customers?
  • As part of the transformation road map, what business partnerships, alliances, and novel talent and design capabilities do companies need to consider or develop?
  • How do companies need to change their business and operating model to monetize more of the value their IP, chips, and solutions provide (e.g., silicon as a service)?

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