Uneven Recovery of the Semiconductor Market

The global analog chip market is bracing for a gradual recovery, often referred to as a "stair-step" phenomenonThis recovery is characterized by a revival in the consumer electronic segment, while the industrial and automotive sectors continue their downward trends, albeit with some signs of stabilityA noteworthy factor influencing this recovery is China's unique market dynamics, which suggest that its analog chip market is poised for resurgence ahead of its overseas counterparts, largely due to the structural differences in downstream applications.

In 2023, the overall semiconductor downturn led to a decline in the global analog chip market, dropping to $83.91 billion, a decrease of 5.7% year-over-yearNevertheless, there is optimism for a rebound fueled by an increase in demand from growth areas such as artificial intelligence, high-performance computing, and electric vehicles

Additionally, with the consumer electronics market—represented mainly by smartphones and personal computing—beginning to show signs of warming, expectations for a market recovery are becoming more positive.

As for domestic companies, the trends mirror those observed on the global stageIn the first quarter of 2024, leading industry player Santan Semiconductor emerged from its downward trend, announcing a revenue of 729 million yuan, an impressive 42.03% increase year-over-yearThe company’s net profit attributed to the parent company's shareholders surged by 80.04%, reaching 54.38 million yuanMost notably, Santan’s gross margin rebounded to 52.49%, reversing five consecutive quarters of decline.

Similar positive performance was noted for Nanxin Technology, which reported a staggering revenue of 602 million yuan, marking a year-over-year growth of 110.68%. Its net profit soared 224.79% to 101 million yuan

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Aiwai Electronics also demonstrated robust performance, with revenue of 776 million yuan, an increase of 101.75%, and a net profit of 35.82 million yuan, up 150.74%. By latest projections, Nanxin anticipates revenue between 1.232 billion and 1.302 billion yuan for the first half of 2024, indicating a year-on-year growth of approximately 86.51% to 97.11%.

Several influential industry research organizations, including Gartner, WSTS, and IDC, forecast a prosperous outlook for the global semiconductor industry in 2024, with Mordor Intelligence estimating the analog chip market will reach $91.26 billion and expand to $129.69 billion by 2029.

Analog chips find extensive applications across various electronic products and systems, spanning industries such as automotive, industrial, telecommunications, and consumer electronics

This diversity of applications serves as a critical driver for demand in the analog chip market.

Moreover, there is a significant contrast in application trends between international and domestic analog chip manufacturersWhile foreign producers focus primarily on industrial and automotive electronic markets, Chinese manufacturers largely concentrate on consumer electronicsThis structural disparity in markets contributes to a “stair-step” recovery in the analog chip industry, with consumer electronic products set to recover ahead of the industrial and automotive sectors, and the domestic market expected to improve before overseas markets.

Market recovery projections have grown increasingly optimisticAccording to East China Securities, during 2021 to 2022, the growth rates for the global analog chip market were 33% and 14%, respectively, outpacing the overall semiconductor industry's growth during this time

However, the second half of 2022 witnessed a downturn in sales due to the combined effects of a sluggish global economyConsequently, the market for analog chips shrank from $88.99 billion in 2022 to $83.91 billion in 2023.

Entering 2024, demand from sectors such as artificial intelligence, high-performance computing, and new energy vehicles, coupled with renewed interest in consumer electronics like smartphones and personal computers, has led market research firms to release optimistic growth forecasts for the semiconductor industryWSTS predicts that due to the proliferation of generative AI and the corresponding surge in related semiconductor product demand, 2024 global semiconductor sales will reach $588.36 billion, reflecting a 13.1% increaseIDC's forecast is even loftier, expecting this figure to hit approximately $632.8 billion—a 20.2% growth

Gartner aligns with similar expectations, projecting $632.8 billion in sales, albeit with a lower growth rate of 16.8%.

According to data from the American Semiconductor Association, global semiconductor sales in the first quarter of 2024 amounted to $137.7 billion, displaying a 15.2% year-over-year increase, which aligns closely with these forecastsFurthermore, the president of the American Semiconductor Association indicated that growth in the semiconductor market is anticipated to continue through the remainder of 2024, with double-digit growth rates expected.

As a critical component of the semiconductor sector, analog chips are forecast to recover in tandem with the overall market growthMordor Intelligence anticipates that by 2024, the global analog chip market will expand to $91.26 billion, with the Asia-Pacific region emerging as the largest and fastest-growing market for these products.

However, it is essential to recognize that the current downturn in analog chips is characterized by a unique cycle, where differing segments of demand—from consumer electronics to industrial and automotive markets—have experienced alternating declines

This complexity in market dynamics allows us to better understand the recovery trends.

To elaborate, in the first quarter of 2021, the demand for analog chips within the consumer electronics sector drastically fell, particularly due to decreasing sales of smartphones and personal computersMeanwhile, the industrial and automotive sectors continued to drive demand for analog chips, which initially boosted prices and mitigated the impact of declining demand in consumer electronicsHowever, as the industrial and automotive sectors reached peak demand, the prices of power management and signal chain chips began to decline in the fourth quarter of 2022 and continued this trend into early 2023.

Consequently, consumer electronic analog chips entered a phase of inventory adjustmentPresently, it seems that this adjustment has concluded, with clear signs of demand resurgence in the consumer market

For the industrial and automotive markets, although demand continues to decline, signs of stabilization in inventory and orders suggest that a recovery sequentially in the consumer, automotive, and industrial segments may occur.

In the consumer market, a recovery is already underwayRecently, data from the Top Leopard Research Institute indicated that China's analog chip market now holds the largest share globally, with a market size of $32.03 billion in 2022, accounting for 36% of the global marketThe growth rate of China's analog chip market is anticipated to exceed that of the global market, potentially reaching $57.38 billion or 43% of the global market share by 2027.

However, a critical structural difference exists between China's analog chip market and the global marketAccording to Chip Eight data, global analog chip applications focus primarily on computers, telecommunications, automotive electronics, and industrial applications, with respective shares of 25%, 25%, 20%, and 15%, while consumer electronics account for only 10%. In contrast, the Chinese market sees consumer electronics, automotive electronics, and industrial applications make up 30%, 25%, and 15%, respectively.

Because analog chips used in telecommunications, automotive electronics, and industrial control are complex and have high design requirements, many domestic companies, having entered the market relatively late, have opted to focus on consumer electronics

This strategic decision has yielded significant early successes.

According to Guoyuan Securities, in 2023, domestic analog chip companies such as Santan Semiconductor, Nanxin Technology, Aiwai Electronics, Jihua Te, and Silan Electronics had the proportion of revenues from consumer electronics products at approximately 53%, 95%, 96%, 41%, and 38%, respectivelyThis high proportion of consumer electronics in Chinese analog chip firms' revenues indicates a quicker entry into the recession cycle compared to their foreign counterparts.

Indeed, since the first quarter of 2021, the consumer electronics market has experienced a pronounced downturn, outpacing declines in the automotive and industrial sectors by several quartersAs signs of recovery emerge in the global smartphone market in the latter half of 2023—particularly with the launches of new products from domestic brands such as Huawei and Xiaomi—China’s smartphone market is slowly shaking off its downturn.

The Ministry of Industry and Information Technology reports that from January to May 2024, China’s mobile phone production reached 620 million units, up 10.60% year-over-year, including 460 million smartphones, which marked a 12% increase.

Furthermore, customs statistics reveal that, from January to May 2024, China exported 55.56 million laptops, a 5.60% increase, and 300 million mobile phones, up 4.70%. These figures indicate that the domestic consumer electronics market has entered a normal growth phase.

On a company level, in 2023, Santan Semiconductor reported revenues of 2.616 billion yuan, which represented a 17.94% decline, while its net profit attributable to shareholders plummeted by 67.86% to 281 million yuan

However, its revenue decline began to slow in the latter half of 2023, with decreases of just 3.70% and 5.25% in the third and fourth quarters, respectively—significantly lower than the declines seen in earlier quartersBy the first quarter of 2024, the company had returned to positive growth, mirroring outcomes from Nanxin Technology and Aiwai Electronics—both of which also demonstrated marked recovery.

In contrast, companies with higher revenue shares from automotive and industrial analog chips, such as Nanxin Micro and SiRiver, saw minimal improvementsAccording to Choice data, in the first quarter of 2024, Nanxin Micro's revenue was 362 million yuan, down 23.04% year-over-year, and its net profit reached -150 million yuan, a staggering year-over-year decline of 9677.28%. SiRiver recorded revenues of 200 million yuan, 34.90% lower than the previous year, with a net profit of -49.17 million yuan, which represents a drop of 3098.30%.

This data illustrates that in the recovery phase of the analog chip market, domestic firms focusing on consumer electronics are seeing their performance rebound first.

Foreign manufacturers are also beginning to stabilize

The global analog chip market continues to be dominated by international companies, with the top ten manufacturers holding over 70% of the market shareNotably, Texas Instruments stands out with a commanding 19% market share, while Analog Devices follows closely with about a 9% shareConsequently, the performance metrics of Texas Instruments and Analog Devices can often reflect broader market changes within the global analog chip sector.

According to Guoyuan Securities, Texas Instruments primarily serves the industrial and automotive markets, with respective revenue contributions of approximately 40% and 34%. In the first quarter of 2024, the company's revenue stood at $3.661 billion, down 16.40% year-over-year, while its net profit reached $1.105 billion, marking a 35.30% decreaseAdditionally, the gross margin declined to 57.22%, down 8.16 percentage points from the previous year.

While Texas Instruments' performance remains lackluster, it is crucial to note that the company adopted a more aggressive pricing strategy in 2023, which involved substantial price reductions amid weak industry demand—a decision that significantly impacted its gross margin.

However, during the earnings call for the first quarter of 2024, Texas Instruments indicated that analog chip prices are now at an absolute low, suggesting the end of its aggressive pricing strategy.

Regarding inventory, Texas Instruments showed a notable increase in 2023, with total inventory rising from $2.757 billion in 2022 to $3.999 billion

By the end of the first quarter of 2024, its inventory amount reached $4.083 billion, indicating no further explosive growth in stock levels—suggesting an alignment to optimal inventory levels.

Moreover, according to findings from Founder Securities, customers of Texas Instruments dealing with industrial analog chips are nearing the end of their inventory consumption cycle, and recovery signs are emerging in several sectors with shorter business cycles, predicting a prolonged upward trend for semiconductor demand in industrial and automotive sectors.

Analog Devices exhibited similar results to Texas InstrumentsAccording to Choice data, in the second quarter of its fiscal year 2024, the company’s revenue was $2.159 billion, down 33.83%, with a net profit of $302 million, down 69.09%.

However, in terms of order and inventory, Analog Devices is faring better than Texas Instruments

Guoyuan Securities notes that the company's customer order volume has grown for three consecutive quarters, and the cancellation of orders has decreased significantlyFurthermore, its inventory decreased by $74.14 million quarter over quarter, with inventory turnover days dropping from 201 to 192 days, and channel inventory turnover also reducing to between 7 to 8 weeks—returning to normal levels.

The data from Texas Instruments and Analog Devices indicate that while their performance continues to decline in the first quarter of 2024, there are signs that both companies are on the brink of stabilization.

For domestic manufacturers, the current situation presents significant development opportunitiesBetween 2018 and 2023, global sales of new energy vehicles soared from 1.89 million to 14.65 million, with growth spikes of 119.50% and 63.60% witnessed in 2021 and 2022, respectively

Although growth rates tapered to 37.60% in 2023, during this period, sales of new energy vehicles in China reached 9.5 million, achieving a penetration rate of 31.60%—positioning China as the world’s largest market in this sector.

Additionally, data from the Top Leopard Research Institute reveals that analog chips account for the largest proportion, approximately 26%, of automotive chipsThis is largely driven by the trends of electrification, intelligence, and connectivity within the automotive sector as more sensors, power semiconductors, and electronic components get integrated into vehiclesAs a result, the need for more power management chips to facilitate current and voltage conversions is propelling the growth of the analog chip market share.

Furthermore, the estimated value of analog chips per vehicle was about $150 in 2020, with projections indicating this figure could reach $300 by 2027, resulting in a compound annual growth rate exceeding 10%. This growth signals significant expansion for the automotive analog chip market.

Despite the ongoing growth in global new energy vehicle sales and the increasing value of analog chips per vehicle, companies such as Texas Instruments and Analog Devices have reported sustained declines in performance

Notably, the price of automotive analog chips peaked in the first quarter of 2023 and has since decreasedThis decrease is primarily attributable to rising inventory levels within the new energy vehicle market and a slowdown in sales growth, leading to waning demand for analog chips.

For Chinese manufacturers, the evolving inventory cycle within the new energy vehicle sector presents a fortuitous opportunityIn contrast to consumer-grade chips, automotive-grade chips have stringent validation cycles and reliability requirements, which necessitate significant time and resource investment by companies before they can begin large-scale supply to partnersThe current new energy vehicle inventory cycle allows domestic companies essential time for research and validation development.

As of now, Santan Semiconductor has developed a variety of automotive-grade power management and signal chain analog chips that conform to automotive application standards and have passed AEC-Q100 testing; several of these products are already in mass production, while others are at the validation and sampling stages