A global slump in demand for consumer electronics is contributing to a worldwide fall in semiconductor orders that is heavily impacting manufacturing industry output in South Korea and Taiwan, as their economies are hugely dependent on hi-tech products and the semiconductor industry in particular.

The degree of over-specialising in certain Asian markets mean that when things are going really well it is great. However, markets that are over-reliant on particular products are vulnerable to down periods and the latest figures from Interact Analysis’s Manufacturing Industry Output (MIO) Tracker show just how much falling semiconductor demand is affecting South Korea and Taiwan.

Interact Analysis predicts that both countries will see their economies shrink by 10% or more next year. It was inevitable that the semiconductor market would be unable to sustain the levels of growth it has seen in the past couple of years, as supply chain problems coupled with unprecedented levels of orders seeded strong conditions for growth.

As predicted, demand has now dropped back, and in some regions has fallen off a cliff. This includes South Korea and Taiwan, which are both facing huge drops in production, according to indicators published by their respective statistics offices.

South Korea’s manufacturing industry has been over-performing during the last couple of years, driven by massive demand for semiconductors, which accounted for over a fifth of the South Korean economy in 2022. However, the market for semiconductors and components is now forecast to shrink by almost 30% and MIO (manufacturing industry output) growth for South Korea is subsequently predicted to contract by 9% in 2023.

Biggest victim
With regards to Taiwan, the country will be the biggest victim of the semiconductor slump, as roughly 40% of manufacturing output is tied to semiconductors and the allied electronics industry. As a result, they predict Taiwanese manufacturing output will shrink this year by nearly 20%, having a substantial impact on the national economy. Following very strong years of growth for semiconductor manufacturing output in 2021 and 2022, South Korea is still not expected to drop below 2019 levels, but Taiwan looks set to fall below this benchmark.

The latest analysis and forecast of the industry published by WSTS (World Semiconductor Trade Statistics) in May 2023 saw a substantial downwards revision of its forecast for 2023, from a contraction for 2023 of 4.1% predicted last year, to a 10.3% pull-back. This pattern can also be seen in financial data published by large semiconductor suppliers in both Taiwan and South Korea.

WSTS has lowered its outlook for Asia as a whole, in part because of the slowdown in regions such as South Korea that had been performing above and beyond expectations due to heightened semiconductor demand.

Looking at Taiwan’s largest semiconductor suppliers, TSMC saw its consolidated year-on-year revenue growth for 2023 fall from +65.3% in May 2022 (total annual revenue of $48 billion) to -4.9% in May 2023, while ASE Technology dropped to -14.1% in June 2023 compared with 33.9% in June 2022 (total annual revenue $12.5 billion). TSMC has previously achieved double-digit growth each month for the past two years, with month-on-month highs of up to 60%.

However, AU Optronics appears to be the only large semiconductor producer in Taiwan to have lost revenue for two years in a row, recording a drop in year-on-year revenue growth of -20.1% year to date compared to -33.4% for 2022 (total annual revenue $10 billion). The reasons behind this are unclear, but may be linked to problems AU has had in expanding capacity to compete with other large AMOLED manufacturers and its switch to focus more of its resources on microLED R&D.

Positive order books
Despite plummeting production levels for semiconductors, WSTS is also seeing positive order books in some areas, including North America, Europe and Taiwan. However, other regions have seen orders all but collapse and the impact of the Inflation Reduction Act in the USA is driving up domestic orders and demand rather than improving order books worldwide.

The reasons for plummeting semiconductor production output are complex, with much of the impact attributable to the falling demand for consumer electronics. There are also factors specific to the semiconductor industry, including the need for many chips to be both tailored and available quickly.

Following the supply chain disruptions and semiconductor shortages of recent years, companies often order from three or four different companies. This means when the orders come in, either the customer or the vendor ends up with a surplus, and these resulting stockpiles have caused a subsequent slowdown in production orders. Semiconductors are also small components that are relatively cheap on an individual unit basis and do not spoil so are easy to store.

However, the semiconductor industry is predicted to bounce back fast, with an uplift in output already anticipated for next year. South Korea is now shifting its ambitions towards the emerging market for AI semiconductors and has made no secret of the fact that it sees this as the next segment to boom. The government is heavily backing AI, making it part of the nation’s digital strategy and announcing last year it is planning to spend $786 million on AI semiconductor R&D over five years. Furthermore, its strong AI base and global dominance of the memory chip market through companies such as Samsung and SK Hynix are likely to help it achieve this goal.