Applied Materials Inc, the biggest maker of semiconductor-manufacturing equipment in the world, has seen many of its largest customers slashing their budgets for new plants and equipment this year. The trend is in response to a general glut within the industry. Despite that, the American chip equipment maker gave a strong sales forecast for the current quarter.

Applied Materials forecasts it will benefit from demand, especially for gear that makes auto and industrial chips. For context, the average analyst estimate is US$6.3 billion, and Applied Materials said its second-quarter sales would be around US$6.4 billion, according to Bloomberg.

The company’s latest outlook suggests there are still bright spots in the chip industry, including automotive semiconductors. “While such products are typically built on older machinery, customers are adding more capacity to keep up with demand,” CEO Gary Dickerson said in an interview. He believes people have underestimated the strength of this business. 

“We’re positioned to outperform the market in 2023. We’re more resilient,” Dickerson reiterated. In contrast, chipmakers like Analog Devices Inc. and GlobalFoundries Inc. have indicated there are still shortages of some semiconductors, particularly those used in vehicles, factory equipment, and smart internet-connected appliances. 

Then there’s Taiwan Semiconductor Manufacturing Co. which has said it will have to build out its capacity to produce such parts. 

Applied Materials is optimistic and it makes sense

To give an idea of how the industry has been performing, global semiconductor sales data released earlier this month showed the industry experienced significant ups and downs in 2022. While chip sales reached the highest-ever annual total in 2022, the slowdown in the second half of the year substantially limited growth.

But as the Semiconductor Industry Association’s (SIA) Director of Industry Statistics and Economic Policy, Robert Casanova, puts it, “In the current cycle, after a brief downturn in early 2020 at the start of the pandemic, the semiconductor industry experienced a period of tremendous growth, and now it is on a significant downward trend that started in the second half of 2022.”

He noted that a deeper dive into the year-end data reveals how this pattern is consistent with the semiconductor industry’s predictable cycle. Casanova explained that the current short-term downturn does not change the reality that long-term growth prospects for this foundational technology remain very promising.

Indeed, Applied Materials understood how macroeconomic headwinds had created significant short-term challenges for the semiconductor industry, resulting in weaker industry growth in 2022 than was previously expected. But the company is also aware that short-term adjustment does not change the structural drivers of industry growth that are expected to reassert themselves and propel continued growth over the long term. 

“The net of this is that semiconductor demand will grow over the long term as chips continue to make the world smarter, more efficient, and better connected,” Casanova noted.

Demand is here to stay

Based on the SIA’s analysis, the semiconductor industry has shown consistent growth when zoomed out from short-term demand fluctuations and looking at the long-term trend over the last two decades. Annual sales grew from US$139 billion in 2001 to US$573.5 billion in 2022, an increase of 313%. Over this same period, unit sales of semiconductors increased by 290%, reflecting the increased demand for semiconductors throughout the economy. 

A 2020 study by the SIA and the Boston Consulting Group found that global demand for semiconductor manufacturing capacity is projected to increase by 56% by 2030. “As this long-term trend continues in the years ahead and demand for chips rises, semiconductor companies will need to invest in more research, design, and manufacturing. The question is not whether more chip manufacturing facilities, or fabs, will be built, but rather where they will be built,” Casanova concluded.