JPMorgan on semiconductor shortage and outlook for 2022, 2023
SK Hynix’s DRAM Memory Chips are arranged in a photograph taken at Seoul’s Headquarters, South Korea on Jan. 28, 2013.
Jean Chung | Bloomberg | Getty Images
The global chip shortage is set to drag on till 2022 — but the situation could improve from mid-year onwards as more supplies become available, a top semiconductor analyst at JPMorgan told CNBC.
The U.S. investment bank is recommending investors pursue longer-term trends in the semiconductor space — in areas like high-end computing globally as well as less-advanced technologies in China.
A continuing supply crunch for chips has hurt productionThere are many industries that use them, including automobiles, computers, phones, laptops, and consumer appliances.
“We are not expecting 2023 to be in supply shortage — so, that is probably the first thing that we can say,” Gokul Hariharan, co-head of Asia-Pacific technology, media and telecom research at JPMorgan, told CNBC on Wednesday.
He said that 2022 is “a bit more difficult.” Hariharan said that while things could get better in the second half, more supply will be available, the industry could see shortages for the first six months.
There is a lot of capacity online. Not only from foundries, but also from other companies. [integrated device manufacturer] companies. All the U.S. and European IDMs are also expanding their capacity — a lot of it is slated to come online from the middle of next year onwards,” he added.
Foundries can be companies contracted by semiconductor manufacturers to produce chips. IDMs on the other side are companies that manufacture, design and sell these chips.
Hariharan explained to CNBC that JPMorgan suggests that investors begin pursuing long-term trends in semiconductors, which are more structural and less cyclical.
While structural trends can be long-term and permanent changes to an industry, cyclical trends may return to their initial point in a few years.
He said that there are two trends the bank believes will be “really favorable” over the next three- to five years.
Hariharan states that the top-end segments of high-end computer computing are the first. High-end computing is experiencing ongoing disruption globally. It used to be monolithic, but it’s becoming more fragmented with the entry of new companies.
“There is a lot of fragmentation of that space happening — and that is definitely leading to faster growth,” Hariharan said. “So that is a space, I think, we are expecting it to grow maybe double digit — 15% to 20% — over the next three to five years.”
JPMorgan sees a second positive trend in Chinese semiconductor firms that are focused on long-term, legacy technologies. This group produces a wide range of lower-end chips, including microcontrollers and sensors, as well as other products for consumers.
Hariharan explained, “We see that more companies are rising in China with the intention to target these longtail technologies.”
The local demand is evident. These companies serve only 5%-10% of the local market at any given time. The potential market for addressable markets is between 5-10 [times]”They’re serving right now,” he said.
Asia’s top semiconductor firms by revenueAccording to Refinitiv Eikon, recent quarters have seen double-digit growth in annual profits.
Companies find chip manufacturing attractive in a world of shortages.
The example of this is the Taiwan Semiconductor Manufacturing CompanyIs reportedly raising prices by 10% for advanced chips, while less advanced chips — used commonly by automakers — would cost 20% more. TSMC is world’s biggest contract manufacturer of semiconductor chips.
Their fortunes at the stock market were mixed.
Although the likes of TSMC are popular, MediaTek, UMC Renesas Electronics are up between 16% and 45% so far this year, shares of Samsung Electronics — the world’s largest chipmaker by revenue — and SK Hynix are down 13% and 6%, respectively, in the same period.
Hariharan stated that memory chips are a significant component of Asia’s semiconductor industry, and that prices for memory have fallen since October.
He said that the market had been expecting a bit of a decline in this space so that it is going through a kind of down cycle. The market is also a bit concerned about the peak of the cycle, which I think is the other aspect.
Both Samsung and SK Hynix make memory chips.
Hariharan said that most investors won’t pay if the company fails to exceed earnings expectations in subsequent quarters.
JPMorgan believes there will be a brief downturn in the memory cycles as industry dynamics are better than past downcycles, which were longer.