Navigating the semiconductor downturn

What the industry can expect in the coming year

As the semiconductor industry faces a downturn, executives and boardrooms are working to understand the potential duration of the downturn and which kinds of chips will be most heavily impacted. A key question is: What is the best way to prepare and respond to these challenges?

A looming downturn

Semiconductor companies have been enjoying a golden age of profitability and growth over the past two to three years, thanks to the pandemic-induced shift toward remote work and the resulting surge in demand. This has led to higher share prices and valuation multiples, as well as intense competition for talent. However, the short-term growth and profitability of the industry will likely be hindered by factors such as decreasing demand, high wages, trade restrictions imposed by the US government, and rising inflation countered by interest rate hikes.

With the combination of inflation, weakening demand, and excess capacity, the semiconductor industry is likely on the brink of a bearish cycle. According to our analysis based on publicly published revenue guidance, 62% of semiconductor companies have already reduced their guidance for next year in their latest earnings cycle. As the semiconductor industry faces a downturn, executives and boardrooms are working to understand the potential duration of the downturn and which kinds of chips will be most heavily impacted.

Navigating the Semiconductor Downturn

What’s different this time?

While symptoms such as softening demand and elevated inventory levels may seem similar to previous downturns in the semiconductor industry, there are key differences in the underlying causes and potential outcomes of this cycle. The current downturn isn’t solely driven by market forces, but rather a complex combination of factors including the lasting impact of the COVID-19 pandemic, increased geopolitical complexity, and shifts in the labor market.

Our 2023 semiconductor outlook offers insights on the distinctive characteristics of the current downturn and areas of focus that, with proper planning and strategic decision-making, can assist companies in overcoming the downturn and becoming stronger. Some of these opportunities are listed below, but additional information can be found in our annual industry outlook.

  • In the face of volatile market conditions and a growing emphasis on ESG performance, semiconductor companies and governments are seeking ways to strengthen their supply networks. By reconfiguring their supply chain, they aim to create a more resilient and adaptable system that can respond quickly to changing market dynamics and evolving sustainability standards. 
  • The semiconductor industry is facing a talent and skill shortage that is expected to worsen in 2023 and to continue to be a challenge for the rest of the decade. To address these needs, the chip industry should consider partnering with universities and local schools and collaborating with local governments, among other things.
  • Companies have likely been laser-focused on navigating the current constrained supply environment, doing everything they can to stay competitive. However, as the market slows down and the need for additional capabilities becomes more apparent, companies are often expected to take a step back and consider investing in building more resilient capabilities to thrive in a more balanced market.

As such, we recommend semiconductor companies consider a series of tactical activities to prepare for the downturn and strategic considerations for the long term. These have been carefully selected based on our analysis of the market trends and our work with semiconductor companies. By taking these steps, businesses may be better prepared to respond to changing market conditions and remain competitive.

A practical approach for strengthening supply chains

Fluctuations in the economy could expose shortcomings in a company’s core capabilities. Over the past two years, some businesses may have over-indexed on addressing supply issues at the expense of investing in their long-term supply chain capabilities. However, as the market pivots, it will likely be important for these businesses to consider how they could quickly reconfigure their capabilities to respond effectively. Failing to do so could leave them vulnerable to future disruptions and unable to compete in an increasingly dynamic global economy.

Through our work with semiconductor companies during previous economic downturns, we have developed a practical and effective framework to help quickly identify and overcome challenges, while driving toward solutions. This framework can be a valuable tool to introduce new capabilities as well as drive continuous improvement in existing, but perhaps underperforming, capabilities as businesses prepare and respond to the downturn.

  1. See the problem: Surface critical challenges disrupting operations.
  2. Control the problem: Deploy manual solutions to create impact immediately.
  3. Solve the problem: Build innovative solutions to address key operational challenges.
  4. Sustain the solution: Automate the solution through enterprise technology enablement and change management.

Opportunities for future growth

While it may be important for companies to address and manage the challenges presented by a downturn, truly innovative and successful organizations also look beyond the current cycle to fundamentally restructure and improve their operating models.

To capitalize on the strong long-term growth projected for the semiconductor industry, a global market size of $1 trillion by 2030, companies may consider making strategic changes and investments that can help set the stage for future success. We recommend that companies take a proactive approach and consider the following three areas to help emerge from the downturn in a stronger position than before.

Collaborative planning
To minimize latency in their supply chains, semiconductor companies may need to prioritize the development of robust, collaborative planning capabilities that transcend organizational boundaries. This could mean working closely with supply chain partners to develop processes such as demand planning and sales and operations planning, which are driven by a clear understanding of customers’ forecasted needs, and efficiently manage changes in demand, while considering the cost of agility.

Technology portfolio digitization and optimization
Supply chain systems and data architectures in the semiconductor industry can often become customized, complex, and fragile due to organic growth over time or mergers and acquisitions activity. Companies may turn to quick-fix solutions to their data and IT needs, but these short-term approaches can have long-term consequences and may not be sustainable. In order to scale and stay competitive, it may be essential for semiconductor companies to prioritize optimizing their technology footprint and aligning on an enterprise-wide data strategy.

Design for the supply chain
When designing a product, it can be crucial to consider the long-term impact of component choices, as it can be difficult to make product structure changes after it has been designed. Implementing a Design for Supply Chain (DfSC) strategy during the design process can help mitigate this issue by using fewer, more fungible components that can be configured into a variety of end products. This approach could lead to reduced SKU proliferation, lower inventory levels, more accurate demand signals, and the production of profitable SKUs.


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