Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
Speaker: I'm Fred Newman, Chief Asia Economist at HSBC, and today we're focusing on one of the region's pivotal industries.
Speaker: From the phones and computers you're listening on right now to the cars we drive and servers where we store our data, semiconductors are not just an integral part of everyday life, they are also a very significant part of Asia's economy.
Speaker: It's a story of supply chain disruptions and booming demand fueled by the pandemic, with geopolitics, government subsidies and growth opportunities all thrown into the mix.
Speaker: My guest today is head of Asia technology research, Frank Lee.
Speaker: We've got plenty to unpack, so let's get to it.
Speaker: A few facts to keep in mind while you are listening.
Speaker: Asia is by far and away the global leader for semiconductor manufacturing, with more than 90% of revenue from foundries or fabs, as they are known, being generated in the region.
Speaker: Also, more than 70% of semiconductor capex came from Asian companies in 2021, led by the likes of TSMC in Taiwan,
Speaker: and Samsung in Korea.
Speaker: Even the top US chip makers are heavily exposed to Asia with more than 60% of revenue for Qualcomm, Intel, and AMD coming from the region.
Speaker: Frank Lee joins me now with a big picture view of the sector.
Speaker: Frank, great to have you on the podcast.
Speaker: Thanks, Fred.
Speaker: It's good to be here.
Speaker: So help us set the scene here.
Speaker: We've seen a semiconductor shortage last year, unprecedented by some measures during the pandemic.
Speaker: What really caused that big disruption in the semiconductor space over the past year?
Speaker: Yeah, that's a great question.
Speaker: I mean, I don't think anybody really could foresee the magnitude of the shortage.
Speaker: I think basically you had the perfect storm for the overall industry.
Speaker: You had underinvestment by a lot of the mature manufacturing players for many years, and then an unprecedented demand boost
Speaker: In old demand areas that nobody expected to see grow, such as PCs, that grew by 30% in 2020 and in almost 20% in 2021, this is an end market that basically had no growth for 10 plus years.
Speaker: So I think that, along with increasing content growth in areas such as autos hitting at the same time, created basically a huge demand that nobody anticipated that led to this shortage.
Speaker: So you described a perfect storm once in a, I guess, century event, if you will.
Speaker: But we're now coming out the other side.
Speaker: What's the state of the semiconductor sector now?
Speaker: Certainly, we've seen autos decline for electronics.
Speaker: Have backlogs completely evaporated?
Speaker: Or how resilient is the semiconductor sector at the moment?
Speaker: Sure.
Speaker: So just as this shortage was created by an unexpected demand, we are actually seeing the demand picture softening, and it's been a bit staggered.
Speaker: So we've seen consumers lead the decline with a much bigger weakness.
Speaker: So while PCs grew 20% last year, it's now going to fall by more than 20%.
Speaker: So that is basically leading to the beginning of this correction.
Speaker: There are still some areas that were some pockets of strength, such as autos with content growth, but they're not as tight as they were over a year ago as well because you're seeing manufacturers reallocate some of the capacity to the structural growth areas.
Speaker: So the question is going to be, can they continue to fulfill this backlog and for how long, or does ultimately demand in autos also come off?
Speaker: Now, the semiconductor industry is famously very cyclical.
Speaker: You get overinvestment and underinvestment that accentuates the cycle.
Speaker: Have you seen a pullback of investment intentions by semiconductor companies as demand is now cooling?
Speaker: Are they also winding back their investment plans or are they still bullish and going out and building extra capacity?
Speaker: Yeah, this is also an interesting question.
Speaker: I think what you're seeing is they are taking a measured approach.
Speaker: We are not seeing a significant cutback in capacity yet.
Speaker: We are seeing some adjustments made in the short term to 2022.
Speaker: But I think we'll get a better clarity and visibility in the next couple of months as companies will have to give their 2023 capex numbers.
Speaker: And that will set the tone in terms of how people view this correction is going to be.
Speaker: So you described kind of a soft landing, if you will, for underlying semiconductor demand and even for investment.
Speaker: But we've seen some headlines around supply chain disruptions in mainland China of late, some factory shutdowns, for example.
Speaker: How disruptive has that been to the semiconductor supply chains globally?
Speaker: Yeah, that's a good question.
Speaker: I think if you look at mainland China, they are a big consumer of semiconductor chips, but less so as a producer.
Speaker: So when you talk about the disruption to the semiconductor supply chain, I don't think we're seeing a significant disruption, but what we're going to see potentially an impact is the downstream assemblers, the end market demand from mainland China is quite significant.
Speaker: So that could ultimately come back to cause a disruption rather than the actual production itself.
Speaker: Of course, when talking about mainland China, we've also seen rising tensions around the semiconductor supply chains.
Speaker: Famously, the U.S. has imposed restrictions on export of technology to mainland China, for example.
Speaker: But really, from an analyst perspective, how disruptive are these restrictions in the near term to China's semiconductor manufacturing industry?
Speaker: Well, Fred, actually, there's been a lot of coverage on this issue.
Speaker: But if you look at the bottom line financial impact, both to U.S. companies and companies in mainland China from these controls or export disruptions, it's actually fairly limited.
Speaker: The first thing is China itself doesn't occupy a huge percentage of the overall manufacturing of semiconductors today.
Speaker: And secondly, the controls that are being put in place in terms of restrictions, they're basically more about future growth, future opportunities.
Speaker: And even the end market, if you look at some of the restrictions being placed around areas such as AI, it's not a big end market demand today.
Speaker: So I think if you look at the downside on earnings to companies today, it's not significant, but it's more about the unknown, the future growth opportunities that could be impacted.
Speaker: And so it's really about developing future technologies then from mainland China and might kind of restrict that particular part.
Speaker: What kind of technologies do you have in mind here where actually these restrictions could restrain China's ability to develop further?
Speaker: Is it artificial intelligence?
Speaker: What kind of areas are affected by these restrictions?
Speaker: Yeah, so if you look at the sensitive areas, it tends to focus on what they call high performance computing, the most advanced processor chips.
Speaker: So the applications are those are going to be used in things like AI or even autonomous driving, which currently today is not a big market of the overall current demand, but it is a big piece of the future growth that everyone's looking at.
Speaker: So this is a long-term issue then for mainland China, but certainly it introduces some risk around supply chain.
Speaker: Have you seen any evidence of supply chain diversification in the semiconductor space?
Speaker: Is there more production being moved to other markets, say Southeast Asia, for example, or the U.S.?
Speaker: Yeah, I think what you're seeing is, you know, there's two issues.
Speaker: There's the issue in mainland China in terms of their own development going forward and the export controls being put there.
Speaker: And there's also the other issue of other countries trying to reshore their semiconductor manufacturing and diversify some of that risk away from places like Taiwan.
Speaker: But again, this is going to take some time, especially in the advanced process.
Speaker: It's not going to be an easy feat.
Speaker: I don't think you're going to see a very successful reshoring, at least for the next five to 10 years.
Speaker: So while there's going to be incentive to do this, it won't be that quickly.
Speaker: And I think in terms of Southeast Asia, they have a strong history in terms of testing and packaging because of the labor cost advantages.
Speaker: but not so much on the front end, which is a lot more capital intensive.
Speaker: So I don't see the front end manufacturing being moved to Southeast Asia.
Speaker: I think they'll continue to work on the testing and packaging side of it.
Speaker: Thank you very much, Frank.
Speaker: We're now going to take a quick break.
Speaker: We'll be back in a moment to discuss the challenges of shifting semiconductor manufacturing and supply chains.
Speaker: Now, Frank, you've looked at the semiconductor market for many years.
Speaker: It must be striking for somebody like you to see the big investment plans that governments have rolled out, subsidies from Japan to the US to other countries.
Speaker: In the big scheme of things, how easy is it really to catch up with this very advanced manufacturing process?
Speaker: Give us a sense of how complicated the process actually is.
Speaker: And can you just throw billions of dollars at it and these new advanced fabs kind of spring up anywhere?
Speaker: I mean, there's going to be a couple of challenges when it comes to recreating this semi-ignited supply chain.
Speaker: The first thing is just the cost itself is going to be a lot more.
Speaker: So what we've seen in the overall industry the last 20, 30 years is all about efficiency.
Speaker: But now in this new world, I think you're going to see inefficiencies, rising costs go up, just labor costs, the cost of building a fab, just a physical shell is all going to be a lot more expensive.
Speaker: The second thing is also the engineering talent.
Speaker: That's something that remains to be seen how much they can replicate that.
Speaker: In the last 30 years, we've seen a lot of the talent pool shifting.
Speaker: You see places in the US where most of the talented people are going into the internet space.
Speaker: They weren't really going into semiconductors.
Speaker: So now we're trying to recreate this environment.
Speaker: I think it's going to take a lot longer than most of the governments realize.
Speaker: So if you talk about, say, an example, the most advanced fabrication processes that we have today, I think Taiwan leads probably in that particular area.
Speaker: How long do you think realistically would it take to replicate the same advanced technology?
Speaker: Korea probably is fairly close, but could you see other markets getting to that point?
Speaker: What time frame are we talking about?
Speaker: Is it five, ten years or longer?
Speaker: I think if you look at, one, are you capable of even manufacturing?
Speaker: And secondly, are you going to be efficient in doing it?
Speaker: You look at Taiwan, for example, they've been dominating in the advanced process.
Speaker: They're now recreating some of this in the U.S. as well with their investments.
Speaker: But there also remains questions about how efficient their own fabs in the U.S. is going to be relative to manufacturing in Taiwan.
Speaker: There's a lot of upstream material suppliers that needs to develop as well, and a lot of those are
Speaker: are already developed in Asia.
Speaker: So we need to recreate those in other countries too.
Speaker: So the way you describe this is it's a very sticky process that once you've acquired the talent, the suppliers, the networks, actually you can't really easily move these very advanced manufacturing plants to other places.
Speaker: But we're also looking at an industry where there's new technologies coming through.
Speaker: So we have famously Moore's law, which was the doubling of the number of transistors every two years, which increased the computing power by an enormous amount.
Speaker: Are we getting to an end here?
Speaker: Are there technologies that might disrupt this?
Speaker: Does that open a strategic opportunity for others to jump in with new manufacturing approaches from what we have now?
Speaker: Yeah, I mean, I think if you look at, you know, people have talked about the end of Moore's Law for the last 10 years now, but it has continued to extend.
Speaker: You know, the most advanced process today is what they call a 3 nanometer.
Speaker: That will probably be the mainstream of the most advanced process for the next three years.
Speaker: After that, we have a 2 nanometer process that will probably take us over the next 5 to 7 years.
Speaker: So I think if you look at over the next 5 to 7 years, the roadmap is pretty clear.
Speaker: Longer term after that, I think we'll have to continue to see.
Speaker: But somehow, you know, this industry has managed to get efficiencies over time.
Speaker: And I think that will probably still remain the case.
Speaker: So thanks, Frank.
Speaker: You're really describing a sector that is going to a soft landing of some sorts, where companies are adjusting to these political uncertainties that are out there, but really also that in many ways it's very sticky.
Speaker: It's very hard to move these plants.
Speaker: And so probably we're not going to see the shape of these semiconductor supply chains move all too much despite all the headline risk in the coming year.
Speaker: So thank you very much for sharing your thoughts today.
Speaker: All right.
Speaker: Thanks, Frank.
Speaker: And that's a wrap for today's show and for the year.
Speaker: We'll be back at the start of January with the long-awaited return of my co-host, Harold van der Linde, and we'll look forward to bringing you our outlook for Asian economics and equities in the year ahead.
Speaker: Many thanks for joining us under the banyan tree.
Speaker: Have a great festive season, and we'll see you in 2023.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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