The Chip Demand Rebound is Slower Than Expected; Here's Why

While the overall success of the semiconductor industry hinges on teetering supply and demand, the industry strives for equilibrium between them. Particularly in Taiwan, national trade for technology purposes relies heavily on this as chips make up more than 15% of its gross domestic product (GDP). 

While semiconductor supply increases, reduced purchases of advanced technologies slows demand as companies make cuts in the wake of the global economic slowdown. Here we look at some of the contributing factors and stagnating industries.

Global Impacts on Semiconductor Demand

As semiconductor supplies recover, the demand is yet to do so due to various factors, of which all incorporate advanced technologies—many of them require more powerful products to support artificial intelligence (AI) and other digital upgrades.

In recent years, multiple disruptions from various angles played havoc with semiconductor supply, but recovering inventories show promise for the industry’s recovery in this regard. From COVID-19 to international conflicts, we’ve come to learn that the chip supply chain is at risk of myriad outside pressures, however, the effects of these challenges seem to be dampened by the demands from various areas of technological change. 

Some major transitions took place over recent years, as expected, but were also susceptible to the same heightened barriers. As major digitisation developments took place over the years, particularly in telecommunications and IT, their interests lied with semiconductors to provide for, and advance, technological capabilities. Electrification initiatives also had a role to play in this with multiple nations focusing on renewable energy generation and the electric automotive transition. 

While innovation often meets certain hurdles, industries are hopeful that larger negative impacts are behind them, having navigated early-stage delivery during turbulent times. 

The semiconductor industry saw through global disturbances and recognized that demand would soon be its biggest concern, and therefore focused on increasing fab capacity—the likes of Taiwan Semiconductor Manufacturing Company (TSMC) and others playing a key role in inventory growth. 

Shifting Consumer Behaviors

The pandemic marked the largest shift in behaviors and therefore catalyzed the increase in chip demand prior to rollout of critical infrastructure and products on their respective markets. A great example of this was the EV boom, which saw a significant period of growth in the earlier post-pandemic years, but now experienced a slower growth due to multiple factors.

In terms of consumer electronics, it can only be assumed that users became more comfortable with certain technologies (as was expected of them in order to do their jobs), embedding them into their professional lives, and also personal. In 2023, the market saw a near US$15bn increase in size (compared to 2022), and is expected to exceed this leap in the years to come. Meanwhile, despite the EV market’s growth showing promise in recent years, the industry experiences concerns as sales drop and companies scramble to meet consumers' needs, by reducing their prices as much as possible. 

Both of these industries share one thing in common besides their inherent links to consumer behavior—they rely on more advanced chips to allow them to differentiate themselves and maintain the interest of end customers. 

An Automotive Industry Response to Slow EV Demand

Looking deeper into the EV market, we see sales slowing despite increased efforts to reduce the costs of these vehicles to end consumers. Questions have recently arisen around the feasibility of EV adoption as the sole method of decarbonizing the automotive sector. 

As such questions occur, reluctance from consumers due to the cost of EVs puts the semiconductor industry in a difficult position as car sales decline. The EV market is an important one for the likes of Taiwanese manufacturers as more intelligent driving systems and connectivity within the cars require advanced logic chips. 

These new vehicles are digitally integrated, which is a major selling point for EVs over ICEs, so the industry will continue to hope for demand recovery.

Will Geographical Events Halt Chip Production?

Many of today’s applications must be more powerful than ever before. As chips contend with the increasing development of AI, not only are they expected to perform, but they require a larger number of more compact transistors to provide the necessary power for more complex functions. 

The caveat here is that advanced logic chips are largely built in Taiwan. While other countries rush to build fabrication capacity outside the country, the fragility of the Taiwanese supply chain of advanced parts could also be a factor influencing the growth of sales. While the overall market for semiconductors has seen major growth in the past couple of years, more novel chip components are required to build more intelligent technologies. 

A certain geographical element could also impact things further. A major earthquake struck the county of Hualien, Taiwan, causing major disruption to some of its major inroads and city infrastructure. In this region, Taiwan Semiconductor Manufacturing Co. (TSMC), United Microelectronics Corp. (UMC), and Powerchip Semiconductor Manufacturing Corp (PSMC) all operate, and were forced to evacuate plants to shelter from the incoming aftershocks that followed. Despite this, Taiwan expects few long-term impacts to chip manufacturing and distribution.

Beyond disruption in Taiwan, Europe and other countries look to build more chip fab capacity locally in an effort to claw back some independence in the electronics market. Widely recognized as a contender in the various technological feats, the continent’s ability to produce its own chips could support efforts to reduce the costs of technology. With US$47 billion (€43 billion) of public and private investments, localizing its production capacity will help European companies avert any potential supply shortages in the future. 

When Will Chip Demand Recover?

There are various factors at play here, making it very difficult to determine when chip demand will recover. Firstly, demand for advanced technologies and AI-powered solutions must increase in order for technology companies and automotive manufacturers to increase their spend in this area. 

The overall demand slows as a result of consumer behavior changes, and countries look to remedy this by reducing costs. As the cost-of-living crisis and increasing prices of advanced technologies and vehicles shift perspectives, recovery will be a result of cost reduction—a strategy reliant on major global shake up of fab capacity. The impacts of COVID-19 trailed off, but the next major challenge will see more emphasis on low-cost and high-value electronics.