How the Semiconductor Industry Will Get Past the Oversupply Problem

We can expect interesting things in the semiconductor industry this year. The forecast for the year ahead is hard-going. The source of this is an inventory oversaturation on the supply side of semiconductor products, specifically the supply of processors currently held by chip manufacturers. Market growth has slowed and may continue to slow in the next few months. Most predictions are for a market correction and sustained decline in profits for several quarters.

Industry news is challenging, yet also promising

After intense growth in 2017 and 2018, some of what’s being reported for 2019 is challenging, but there is good news as well. Adjustment of inventory will, at any rate, be a challenging but rewarding process in both the short and long term. For example, oversupply makes manufacturers more competitive. When the market is saturated and prices drop as we’re currently seeing in memory modules for example, consumers are riddled with choice. They’ll be even more discerning than usual and will go with the best product at the best price.

This is, of course, good news for industry leaders in semiconductor materials including Shin-Etsu. Suppliers providing semiconductor materials at the beginning of the supply-chain – like silicon, lithography materials, epoxy resin and thermal interface materials – will continue to benefit from judicious consumer preferences at the market-end of the chain.

Ways to overcome include 5G, IoT, Ai and beyond

This doesn’t solve the supply problem as a whole, however. So, how can the semiconductor industry move back out of its bear-pit and recover its dynamism? The good news: a number of developments will quickly and fundamentally change the landscape for the better. Given the current state of the market, these couldn’t be emerging at a better time.

The first is 5G technology. Smartphones and related technology have influenced the fortunes of the industry in ways distinct from pre-smartphone years. These mobile and mobile-friendly technologies presented new challenges and opportunities for the semiconductor industry. 5G is, in a sense, an extension of this. American mobile carriers will be supporting 5G in major cities throughout 2019.

Yet 5G does not render 4G (or 4G LTE) completely obsolete. For the foreseeable future, both technologies will co-exist in smartphones and other mobile devices so the leftover supply of semiconductors for the latter technology won’t have to be scrapped on Day Zero as a result of 5G implementation. Rather, the demand for 5G devices at the consumer end-market may even boost sales of 4G chips upstream for use in those same devices. Both will still, by and large, require the same semiconductor materials. This benefits the whole supply-chain.

Internet of Things as an evolving market

Another development is the so-called Internet of Things (IoT). Intel in particular has leaned into this market and is already benefiting from it. This pivot may well see Intel become the big winner over the next several quarters. The industry will be able to seize new opportunities in this still-evolving market, if manufacturers can provide semiconductor solutions to suit the IoT market, one based in the variation and interactivity of home devices, not to mention interaction with cloud storage and outside networks.

It’s even possible that the further development of this technology will soon dovetail with that of 5G, generating a new market of roaming, always-on devices interacting in completely new ways. In any case, meeting the demands of this market will require a diversified approach to semiconductors and semiconductor materials by industry leaders.

There’s another promising development for the semiconductor industry, albeit more distant: artificial intelligence (AI). AI is still a marginal market and is somewhat far from practical consumer applications, but it’s receiving increasing interest and investment. Processors being developed for AI are intended for completely different operations than those we currently use in most devices, so manufacturer inventory of chips and other technologies being developed for this purpose is unaffected by the oversupply of normal processors. AI is certainly some way off from being a fully-fledged technology relevant to consumer applications, but the demand for this technology is already making itself felt. The possibilities when practically integrated, are endless.

Industry shift is necessary to provide opportunities for future growth

The Internet of Things and 5G will likely reach maturity much sooner. Both of these will push the industry into new challenges, but also yield new solutions and new rewards. These will likely hasten the recovery of the semiconductor market. More importantly, they’ll prompt a fundamental shift in the entire industry by providing additional opportunities for limitless potential.