Semiconductor subsystems: the market decouples from equipment on inventory backlog
Revenues from critical subsystems sales to return to growth in 2024. Yole Group expects a strong demand for 2025.
A build-up in inventory of critical subsystems for semiconductor equipment post-COVID-19 has resulted in a decoupling from the broader equipment market that could take until 2025 to work through, according to Yole Group’s analysis.
Last year was a challenging one for the subsystems market, which recorded a 7.7% year-on-year decline – its first since 2019. That far outpaced a 0.5% decline in the wafer fabrication equipment (WFE) market.
Today, both experts, Gaël Giusti, Senior Technology & Market Analyst, Semiconductor Equipment and John West, Business Line Deputy Director, Manufacturing & Global Supply Chain activities at Yole Group analyze the market status and provide us with a detailed understanding of the markets, ecosystems, and the challenges within these markets.
More news coming from the semiconductor industry: HERE.
Subsystems, equipment revenues diverge
Subsystems, or equipment parts, are critical to the smooth operation of semiconductor equipment. Yole Group categorizes them into eight segments: process monitoring, power, wafer handling, thermal control, fluid management, vacuum, optical and other. Each subsystem segment follows its own market dynamic.
The vacuum and power segments were the hardest hit, experiencing double-digit declines in the first half of 2023 and year-on-year declines of 10.4% and 14.7%, respectively.
However, robust demand for lithography and inspection and metrology tools – particularly in the second half of 2023 – coupled with healthy specialty and advanced packaging markets and a WFE logic market that did not decline as much as the memory one, prevented a further decline in total WFE revenues.
Revenues from subsystems sales typically grow in line with equipment revenues – but during strong upturns they tend to grow faster and conversely, in downturns, they tend to decline faster too, as inventories need to run down first.
However, in 2023 there was a disconnect. Subsystems revenue peaked at around $5.9 billion in the third quarter of 2022 and dropped to $4.8 billion in the first quarter of 2023. Revenues turned higher to reach $5.2 billion in the fourth quarter. Over the same period, equipment revenues peaked at $29.1 billion in the further quarter of 2022 and subsequently dipped to $24.9 billion in the second quarter of 2023 before rebounding to $27.5 billion in the fourth quarter.
John West
Business Line Deputy Director, Manufacturing & Global Supply Chain activities at Yole Group.
“There must have been a lot of inventory being held for subsystems to underperform wafer fab equipment by so much over the last four quarters, including on the OEM side.”
Subsystems market faces inventory correction
The previous two years saw equipment makers increase their orders for subsystems to secure supply and keep up with strong demand, as they ramped up production capacity to address the chip shortage and supply chain disruptions.
However, as the broader slowdown in the semiconductor market in the fourth quarter of 2022 resulted in a deceleration in equipment demand in 2023, equipment manufacturers found that they did not need the volume of parts they had ordered.
“This decline in demand, associated with high inventory levels at OEMs, constituted the “perfect storm” for equipment suppliers in 2023, who were forced to increase their production capacity and quite quickly found themselves with much lower order levels. ”
The power and vacuum parts segments were the most severely affected, as they are closely tied to the memory market, which was the first to decline. The service and support market is significant for the power and vacuum segments and also declined in response, as lower fab utilization rates meant chipmakers did not need to replace parts as fast and often as in 2021/2022 and there was less demand for equipment upgrades and maintenance.
China helped keep the wafer fabrication equipment market afloat, but it could not completely offset the decline in demand.
How will equipment suppliers react to a possible sudden rebound in the market in late 2024 or 2025? Will supply chains cope?
2024 outlook and beyond
Yole Group forecasts that 2024 will be a transition year for the subsystems market: revenue is not expected to decline as it did in 2023, but it will remain lower than the previous three record-breaking years.
“The inventory will have to be digested by the market. It is not going to happen in one quarter, especially with such sluggish demand – the market is improving but remains relatively weak. It is going to take several quarters and very likely most of 2024 to fully digest these high inventory levels, and to see all the equipment suppliers growing as strongly as we saw in 2021 or 2022.”, commented Gaël Giusti.
China is set to remain a significant player in 2024 in driving demand for WFE and related subsystems, as it builds out its domestic industry amid ongoing international trade restrictions.
Yole Group predicts that subsystems revenue will grow by 3-5% in 2024, as the market prepares to transition to much stronger demand in 2025. After dropping to $4.8 billion in the first quarter, subsystems revenue could recover by the end of the year to the $5.6 billion level seen in the fourth quarter of 2024.
The next growth cycle is expected to kick in next year as fundamentals remain strong – as the semiconductor market emerges from the latest downturn, demand for chips can only grow from here.
Today’s question is how well the supply chains will cope with another demand shock. The industry is more resilient than it was a few years ago. But there is still a risk that if demand grows rapidly again in 2025 or later, it is not necessarily a given that supply chains will be able to cope.
How will supply chains evolve? Will they handle potential demand shocks? Keep following Yole Group as analysts are tracking the latest developments.
Stay tuned next week with a new snapshot, next week!
About the authors
John West is Business Line Deputy Director of the Manufacturing & Global Supply Chain activities at Yole Group.
He has over 20 years of industry experience and a successful track record in various strategy and consulting projects.
John has a Bachelor’s degree in Medical Physics from King’s College London and an MBA from Cranfield School of Management.
As part of the Manufacturing & Global Supply Chain activities at Yole Group, Gaël’s expertise is focused on materials, equipment & parts, and manufacturing processes. He is involved daily in the production of technology & market products and custom consulting projects.
Prior to Yole Group, Gaël served as an R&D engineer at Sil’Tronix Silicon Technologies for 5 years, where he was in charge of growing epitaxial AlN thin film on sapphire for RF applications.
Gaël holds a master’s degree from ENSICAEN (Caen, France) as well as a PhD in Materials Science from the University of Birmingham (UK).
John West Business Line Deputy Director, Manufacturing & Global Supply Chain activities at Yole Group.“There must have been a lot of inventory being held for subsystems to underperform wafer fab equipment by so much over the last four quarters, including on the OEM side.”
