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Electronics sector risk report

In recovery

MEDIUM RISK FOR ENTERPRISES

Last Update: July 2024

Strengths & Weaknesses

Strenghts
  • Broad customer base (consumer electronics, automotive, telecommunications, industry, etc.)
  • Digitalization of the economy and AI boost to drive long term growth
  • Technology intensive sector with strong barriers to entry at the higher end

 

Weaknesses
  • Commodity electronics is weaker with low barriers to entry, low margins
  • Many segments are saturated and require a lot of investment and innovation to grow their markets (smartphones, computers etc.)
  • Highly cyclical sector

 

Sector Overview

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What to watch ? 

  • China-US tensions and “semiconductor war”
  • Emerging technologies such as AI that could boost demand and drive further innovation in the sector
  • Industry 4.0 will be about automation and control systems which will require more semiconductors and electronic components 
  • Purchasing-power crisis and households’ intentions to make large purchases (e.g. computers, smartphones etc.)
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2023 was a challenging year for electronic components and especially for semiconductors, which recorded 9% lower sales than in 2022. In 2024, global sales are expected to rebound by over +10% and revenues should beat the 2022 industry record by about 2%. Volumes should rebound, thanks to strong demand related to emerging technologies such as AI that are fueling the need for increased computing power. The continued rise of electric vehicles should also benefit the sector. Moreover, production and inventories are also normalizing, which should smoothen supply chains through more predictable lead times and prices.

Despite the challenging landscape, the semiconductor sector posted an EBITDA margin of about 30% in 2023. Both revenues and earnings are expected to grow by double-digits in the next five years. The sector also continues to exhibit a strong push for innovation – R&D spending accounted for about 14% of sales.

The ongoing tech cold war between the US and China is a major risk for the industry as China is both a key client and player in the global supply chain of semiconductors. These tensions have led to significant trade restrictions but each regional powerhouse (i.e. China, the US and the EU) has also decided to implement strong policies to foster R&D and domestic manufacturing capacities. For instance, the Chips act in the US has already been driving strong growth in industrial manufacturing. Corporates in the sector can benefit from these policies and their financial incentives. Asia’s dominance in the sector is unlikely to be challenged in the future but Europe and the US could reduce their current over-reliance.

Subsectors

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Electronic components can be loosely divided between semiconductors and other active /  passive electronic components and sub-systems.

Semiconductors serve different purposes (computing, storage, power management, communication, etc.) and are found in pretty much each and every electronic device. Product markets are generally concentrated and dominated by a handful of global players. The remainder of the industry is far more fragmented and generally more commoditized, with companies manufacturing everything from printed circuits boards to electronic displays through to resistors, capacitors and switches.

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