The cyclical semiconductor industry faced a challenging year in 2023 and saw its seventh downturn since 1990. Global semiconductor revenue1 amounted to US$533 billion, representing a decline of 11% compared to 2022. According to Gartner, only three of the top ten semiconductor vendors2 posted revenue growth last year, with five experiencing double-digit declines. Intel reclaimed the number one position from Samsung Electronics. The company reported semiconductor revenue of US$49 billion last year, surpassing Samsung's revenue of US$40 billion. Driven by its dominant position in the artificial intelligence (Al) chip market, NVIDIA's semiconductor revenue3 grew 56% to US$24 billion in 2023, propelling the firm into the top five for the first time.4
Source: Gartner. As of January 16, 2024. Data compiled by Nasdaq Global Indexes.
Yet, the market is quickly regaining strength as worldwide chip sales increased year-over-year in November 2023 for the first time since August 2022. Q4 2023 global sales were 12% higher than the total in Q4 2022, and sales in December 2023 were US$48.7 billion, representing a year-over-year increase of 12%. According to the Semiconductor Industry Association, the global semiconductor market is expected to witness double-digit growth in 2024.5 Gartner also forecasts that global semiconductor revenue will grow 17% in 2024 to US$624 billion.6
Al continues to play a pivotal role in bolstering 2024 outlook
Generative Al refers to algorithms that can generate new content, such as text, images, code, simulations, and videos. Generative Al models use neural networks to identify the patterns and structures within existing data to create original content. Given its ability to understand and use natural language for a variety of tasks, many work activities that involve communication, documentation, and supervision have the potential to be automated by generative Al. Demand for generative Al is increasing across many industries, such as healthcare, financial services, legal and the public sector. More than 80% of enterprises will use generative Al in their business by 2026, according to a forecast by Gartner, up from less than 5% in 2023.7 The research firm anticipates that by 2025, over 30% of new drugs and materials will be discovered systematically using generative Al techniques, and 30% of outbound marketing messages from large organizations will be generated synthetically. 60% of the design effort for new websites and mobile apps is expected to be automated by generative Al by 2026.8
The rise of autonomous driving
Before exploring how autonomous vehicles will also contribute to semiconductor demand growth, it is crucial to clarify the levels of autonomy as defined by the Society of Automotive Engineers (SAE). The SAE's six levels of driving automation can be divided into two broad categories: driver support systems from Level Oto Level 2 (shown in blue below) and automated driving systems from Level 3 to Level 5 (shown in green below). While most major automotive original equipment manufacturers (OEMs) have mastered their technologies for Level 2 autonomy, the transition from Level 2 to Level 3- which involves hands-off and eyes-off as the critical step up- is the most significant leap on the spectrum. In June 2023, Mercedes-Benz became the first automaker to obtain US state approval to deploy SAE Level 3 conditionally driving vehicles in California.20 Undoubtedly, more and more carmakers will follow in Mercedes-Benz's footsteps and pursue Level 3 autonomy.
Governments are providing incentives to bolster domestic semiconductor capabilities
As governments worldwide provide incentives to fortify domestic supply chains, bolster technological advancements, and mitigate geopolitical risks, the already intense global competition to secure chips is poised to intensify further.
SOX – the flagship index for the semiconductor industry
Covering the 30 largest US-listed stocks and ADRs of companies primarily involved in the design, distribution, manufacture, and sale of semiconductors, Nasdaq's PHLX Semiconductor Sector™ Index (SOX™) had very impressive returns in 2023, rising 65% and outperforming the Nasdaq-100® and the S&P Semiconductors Select Industry Index by 11 percentage points and 30 percentage points, respectively.
Conclusion
The semiconductor industry is navigating through yet another cycle, with a robust recovery in sales expected this year across most of the major players. Recent advancements in generative Al and large language models are fueling an escalating demand for the deployment of high-performance GPU-based servers and accelerator cards in data centers. Automotive is another strong-growing segment for semiconductors, driven by the rise of autonomous driving and electric vehicles. Several major economies, such as the US and Europe, have implemented policies to subsidize local chip production directly. In addition to subsidies, other countries are also offering tax incentives to manufacturers. These incentives provide a substantial financial boost to companies operating in the chipmaking industry, as the business is capital-intensive and demands significant investments in research and development.
Funds tracking SOX include the Invesco PHLX Semiconductor ETF (Nasdaq: SOXQ), the Mirae Asset TIGER US PHLX Semiconductor Sector Nasdaq ETF (South Korea: 381180), the Cathay PHLX Semiconductor ETF (Taiwan: 00830), and the Global X Semiconductor ETF (Japan: 2243). The Mirae Asset TIGER Synth-US PHLX Semiconductor Sector Leverage ETF (South Korea: 423920) tracks SOX with two times leverage.
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