Softening market conditions and rising uncertainty in global trade and economy have impacted semiconductor spending from the world’s top OEMs, currently facing the steepest decline in over a decade. Worldwide spending from semiconductor OEMs will amount to just $316.6 billion in 2019, which is down 7% from 2018.

The recent decline came after two years of double-digit growth, which pushed the served available market (SAM) to its highest level ever at $340.2 billion in 2018. The semiconductor spend market is at an inflection point, where component demand is transitioning from being driven by mobile device manufacturing to being propelled increasingly by industrial and automotive applications.

The weakening semiconductor spend projection for the current year is broadly underpinned by memory IC pricing erosion, along with a number of end-user equipment market demand issues. These include sluggish OEM revenue growth, global economy slowdown, escalating trade tensions, reduced consumer spending, growing surplus of inventory, along with lower growth in major applications such as smartphones and data center servers. Although chip spending from industrial and automotive applications is now quickly on the rise, the combined spending increase remains insufficient to offset overall semiconductor spending market’s decline.

Due to demand saturation in China, North America, and Western Europe, global smartphone shipments are expected to continue their decline throughout 2019. In addition to factors such as longer device replacement cycles, indifference and sluggish device innovation, and consumers biding time for 5G transition, intensified US-China trade and technology tensions are adding excessive burden to the already softened global smartphone market. Apple’s iPhone shipments and market share in China have dropped consistently every quarter since the trade war began.

As the largest buyer of semiconductors, smartphone manufacturers’ decline have significant impact on worldwide semiconductor spending market, with the chip spending contraction value of mobile phones now comprising upwards of 74% of the total $23.7 billion semiconductor spending market decline in 2019. All five top semiconductor OEMs, Apple, Samsung Electronics, Xiaomi, Huawei, and Oppo, will significantly decrease their respective semiconductor purchases during 2019 to respond to these market changes.

Rapid development of cloud based services is driving tremendous demand increase for data center servers over the past several years; however, a demand slowdown in the first half of the year may potentially weigh down on server’s chip spending growth in 2020. This demand has continued to increase as content service providers delay investments due to slow digestion of hyperscale servers and poor macroeconomic conditions in China. Data center servers make up nearly 29% of total DRAM revenue and it’s expected that with the shipments of servers beginning to pick up near the end of the year, the semiconductor spending market will slightly improve and progress strongly into 2020 with robust growth.

Recovery in 2020

The semiconductor spending market is expected to rise out of the slump in 2020 as the key semiconductor demand drivers recover and the supply and demand dynamics of memory IC are stabilized. Current forecasts suggest that the semiconductor spending market will recover next year with a 4.5% growth to as much as $331 billion.

Despite new 5G infrastructure and 5G smartphones expected to generate new demand growth for semiconductors, the industry is still only expected to rebound moderately next year as consumer adoption will take some time to meet the pace of production. Once economy of scale finally comes into effect, the devices and network service will become cheaper, further boosting increases to adoption rates of 5G technologies.

With the vast amount of data generated from 5G-related applications, and with the launch of a slew of new 5G services and contents, capital investments in data centers are expected to increase in a move to support and monetize the rapid growth of the 5G service ecosystem. Demand is anticipated to improve significantly for the top server OEMs, thus raising overall data center server semiconductor spending by 13% in 2020, and pushing its overall spending share up to 8.4% from 7.8% during 2019.

Even though the semiconductor market outlook for 2020 appears to be positive with the confidence of 5G emerging as the key growth driver, the risk of further escalation in trade disputes, not just between the US and China, but also Japan and South Korea, will continue to weigh down on the semiconductor market’s recovery and push the manufacturing and semiconductor supply chain industry further into uncertainty. Whether the goal is to relocate or diversify production out of China and into Southeast Asia nations, or to forage for new semiconductor materials sources, the affected parties in the supply chain must rethink and redesign their strategies in order to better manage the risk of being impacted negatively.