Mega Wave of Capex Cycle Starts in Logic Semiconductor Industry: Counterpoint Research

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The Counterpoint Research team states under-investment as the root cause of demand-supply imbalance, particularly in logic (non-memory) semiconductor industry

Source – Counterpoint Research

Since the beginning of this year, the concern over shortage of semiconductor chips has spread across the global supply chains of the IT and automobile industries. In fact, chipmakers, as per recent insights by Counterpoint Research, believe this tightness in supply will not be resolved until the completion of inventory replenishment, with H2 2021 as the best-case scenario.

Key reasons responsible for this supply shortage include under-investment in wafer capacity (especially in matured nodes of logic ICs) during 2015-2019, supply chain disruptions due to COVID-19 and geopolitical uncertainties, unexpected gadget demand for work from home (WFH), and improving visibility of emerging technology products such as AI/edge and EV. However, things are expected to change for the better, with 2021 heralding a big capex cycle that will still fall short of meeting the entire demand.

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The Counterpoint Research team has stated under-investment as the root cause of demand-supply imbalance, particularly in logic (non-memory) semiconductor industry.

“Capex is the leading indicator of growth in the semiconductor industry. We use the capital intensity ratio as our base to measure a fab’s expansion for future business. The ratio is calculated by dividing a company’s capital expenses by its revenue generated annually (capex to sales). The lower the ratio, the lesser the likelihood of new capacity or technology being added or implemented in the near future. Specifically, we focus on the Wafer Fab Equipment (WFE) market, representing the majority of a fab’s capex in both foundry (outsourcing) and IDM (in-house) production,” read Counterpoint Research’s report.

Capex boost will not solve the shortage problem in matured nodes

The aggressive capital spending, as per Counterpoint Research, will not solve the supply shortage issue in the near term, especially for matured processes and products considering the long lead time of fab construction and equipment installment, IDMs are still inclined to increase their outsourcing percentage to foundry partners.

“Except TSMC and Samsung, most of tier-2 foundries have been registering poor earnings, low margins and high debt ratio during the past few years. From the profitability perspective, building a new fab for smaller foundries is difficult to consider for the time being,” read Counterpoint Research’s report.

It continued, “Compared to the last capex cycle of the logic semiconductor industry (during 2010-2012, after financial crisis), the current cycle will be longer, stronger and more concentrated in terms of select leaders’ focus on leading-edge technology expansions. Should we be worried about any excess supply at some point? Not yet. If we consider the multi-year market opportunities for AI-enabled chips (like in mobile, server and automotive industries) in need of larger die sizes, and mmWave 5G applications, the capex boom in 2021 might just be the beginning of a wave.”

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