The raw truth is that the Covid-19 pandemic will have an inevitable and negative impact on the Gross Domestic Product (GDP) of every nation across the globe. While a rising tide lifts all boats, a falling tide exposes all vulnerabilities, and while there may be no completely safe harbour from the economic downturn, we can weather the storm and prepare for the next high tide.
Although it has enjoyed consistent growth, for some time the semiconductor industry has been anticipating a period of exceptional growth, where the rate would reach double figures. This ‘double-digit’ compound annual growth rate (CAGR) is not unprecedented and is highly dependent on technological megatrends. In the past this has been provided by the so-called dot.com boom and, after that, the emergence of the mobile (and now smart) phone. The convergence of 5G and AI is expected to provide the perfect storm for the next period of double-digit CAGR and although it may have been delayed by the pandemic, it is still firmly on the horizon.
The decline in GDP has an impact on our propensity to consume, so it isn’t surprising that the consumer industry will be the first sector to feel the effects. A recent study published by McKinsey & Company, titled “Coronavirus: Implications for the semiconductor industry” provides valuable insights into how and why the industry will decline by between 5% and 15% but see growth towards the end of 2020. This relatively short period of negative growth can be negated quickly once the wheels of commerce get back to full speed.
Most of the decline can be attributed to deferred consumption, where planned expenditure is put on hold. This will be most apparent in parts of the economy that rely on demand for investment, such as the PC and Server sector. However, recovery may be faster here due to the ‘new normal’ of online meetings, along with our increased appetite for streaming video entertainment.
Areas where GDP is closely related to sales, such as mobile phones, will see more dramatic falls in demand, which will be felt by vendors of semiconductor devices designed for wireless communications. However, the study expects the sales of semiconductors for wired communications to increase, driven in part by the infrastructural changes required to support more home-based workers. The increase in fixed broadband usage will reach 50% in some countries and coincident with that will be the increased utilisation of the broadband backhaul, generating demand for more routers and switches. Other major sectors that will see short term reduction in demand include automotive, as the sale of new cars drops, and large parts of the industrial sector. Although demand for medical equipment is high right now the report expects to see falls across the market as a whole.
Semiconductor manufacturers can feel assured that demand will return, but there are steps they can take to ensure they will be here to see it. They can adjust their own forecasts based on the rise or fall in demand they expect to see for their own products in the markets and end applications where they are most active. They can also use this time to explore new end applications where they are not currently strong, and this is an area where Publitek can definitely help. Demand will come from old areas, but we can also expect to see new applications that simply were not visible before the pandemic. Consider, for example, the way new working practices will change society, and how technology will enable that. As we come to accept the new norm it will impose change upon all players, and some will be unable to react quickly.
Communication has been crucial throughout the pandemic, sharing information about how the virus is transmitted, what we can do to prevent that and what we should do to keep the reproduction rate down. Communication in a business landscape is equally critical, the silence that surrounds a crisis can be deafening.
If you would like to read the McKinsey & Company report, you can find it here.
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