TSMC Revises 2024 Semiconductor Industry Outlook Prompting Fears of A 2023 Poor Performance Repeat

2023 was not a particularly good year for semiconductor manufacturing, and 2024 looks no better. In a significant move, Taiwan Semiconductor Manufacturing Company (TSMC), the world's leading chip producer, revised its outlook for the microchip industry during its post-earnings call, reflecting evolving market dynamics and emerging challenges.

Based on recent forecasts, the world’s largest chip producer anticipates a deceleration in the growth of the overall microchip industry, revising its forecast to a 10% expansion, excluding memory chips. This adjustment departs from the previously envisaged "more than 10%" growth trajectory outlined earlier.

The subdued outlook is driven by a slowdown in demand for automotive chips and critical vehicle components, dampening earlier anticipations of increasing demand in this segment. That is in addition to ongoing macroeconomic uncertainties and geopolitical factors shaping consumer confidence and end-market demand, casting a shadow over the industry's near-term prospects. This has prompted a reassessment, with a contraction now deemed more probable. 

Despite the tempered industry outlook, strong demand for AI-led applications, driven by innovations in energy-efficient computing power,  will continue to drive resilience amidst the headwinds. TSMC's pivotal role in AI's development, as a key manufacturing partner for tech giants like Nvidia and Apple, positions it at the forefront of the burgeoning AI ecosystem. The company remains optimistic about its growth trajectory, buoyed by robust revenue projections for the second quarter. 

AI-related chips are slated to play an increasingly significant role in TSMC's revenue stream. They account for a tenth of revenue this year and are poised for further expansion in the years ahead, reaching a fifth. Despite the gloomy outlook, the company remained optimistic, forecasting sales growth of 30% in the second quarter.

Still, despite the optimistic outlook and surpassing revenue and profit expectations in the first quarter, TSMC’s stock's American Depositary Receipts (ADRs) declined by up to 6% in response to the revised industry outlook, underscoring the tangible impact of these changes.

The recent news is alarming for many stakeholders as it would be a second consecutive year of decline. In 2023, the industry faced several hurdles, making the year pivotal for chip manufacturing. It was marked by geopolitical shifts, reshoring efforts, and ongoing supply chain dynamics.

Global chip sales declined by 8.8%, reaching approximately US$520 billion. This decrease was primarily driven by the memory chip market, which saw major chip manufacturers experience a significant YOY revenue decline.

For instance, in 2023, Intel, despite reclaiming its top spot in terms of revenue, recorded a 16% YoY revenue decline largely due to shipment decline in both the PC and server segments. Samsung, another major memory chip producer, was massively hit by the slowdown, reporting a 38% YoY revenue decline.

SK Hynix and Micron, two other major players in the memory market, also reported huge revenue declines of 33% and 36% YoY, respectively. The memory market slowdown massively affected both the DRAM and NAND segments, driven mainly by low demand in the PC, server, and smartphone segments and oversupply and excess inventory across the market. 

However, similar to 2024, the AI chips segment remained strong. NVIDIA reported 86% YoY revenue growth in 2023, ranking third in revenue and clinching its first-ever top-five position. The growth was due to its high market share of general-purpose GPUs used in AI/high-performance computing. 

Many stakeholders were optimistic about 2024. Global chip sales were predicted to rebound, reaching US$588 billion, representing a 13% improvement over 2023. The industry was also expected to reach $0.72 trillion by 2024, with a compound annual growth rate (CAGR) of 10.86%.

The growth was expected to be driven by a multitude of factors, including chip manufacturers' learning their lesson and taking necessary steps to mitigate the challenges, as well as policy support, including the CHIPS and Science Act in the US, where $52 billion was committed to semiconductor manufacturing and research.

However, the recent TSMC recalibration of their industry outlook downward casts doubts on these hopes. Amidst ongoing uncertainties, stakeholders across the microchip ecosystem are tasked with navigating evolving market dynamics, leveraging opportunities in burgeoning segments like AI while mitigating risks posed by sector-specific challenges.