Electronics Sector Risk Report

Strengths & Weaknesses

  • A diverse clientele spanning consumer electronics, automotive, telecommunications, and various industries.
  • Ongoing digital transformation and the surge in artificial intelligence are set to propel sustained growth in the long run.

  • Technology-driven sector characterized by significant entry barriers, particularly at the upper echelon.

  • Commodity electronics market faces significant challenges due to minimal entry barriers and slim profit margins.
  • Numerous segments within this industry are saturated, necessitating substantial investment and innovation to expand their market presence, particularly in areas like smartphones and computers.
  • High cyclicality, making it susceptible to fluctuations in demand.

Sector Overview

What to watch ?

  • Escalating tensions between China and the United States have sparked a fierce competition in the semiconductor industry.
  • Cutting-edge technologies like artificial intelligence are poised to significantly increase demand and fuel further advancements in this field.
  • The fourth industrial revolution will focus on automation and control systems, leading to a heightened need for semiconductors and electronic components.
  • A crisis in purchasing power is influencing households’ willingness to invest in major purchases, such as computers and smartphones.

2023 proved to be a tough year for the electronic components market, particularly for semiconductors, which saw a 9% decline in sales compared to 2022. However, the outlook for 2024 is promising, with global sales projected to increase by over 10%, surpassing the industry record set in 2022 by approximately 2%. This anticipated growth is driven by robust demand for emerging technologies like AI, which necessitate greater computing power. Additionally, the ongoing rise of electric vehicles is expected to further support the sector. As production levels and inventories stabilize, supply chains will benefit from more predictable lead times and pricing.

Despite the hurdles faced, the semiconductor industry achieved an EBITDA margin of around 30% in 2023. Looking ahead, both revenues and earnings are forecasted to experience double-digit growth over the next five years. The sector remains committed to innovation, with research and development expenditures constituting about 14% of total sales.

However, the ongoing technological rivalry between the US and China poses a significant risk to the industry, as China plays a crucial role as both a major client and a key player in the global semiconductor supply chain. These tensions have resulted in substantial trade restrictions, yet each regional powerhouse—China, the US, and the EU—has initiated strong policies to enhance R&D and bolster domestic manufacturing capabilities. For example, the US Chips Act is already catalyzing significant growth in industrial manufacturing. Companies within the sector stand to gain from these initiatives and their associated financial incentives. While Asia’s dominance in the semiconductor field is expected to persist, both Europe and the US have opportunities to lessen their current dependency.

Subsectors

Electronic components can be broadly categorized into semiconductors and other active or passive components and subsystems.
 
Semiconductors play a crucial role in various applications, including computing, storage, power management, and communication, making them integral to nearly all electronic devices. The market for these products is typically concentrated, with a few major global companies leading the way. In contrast, the rest of the industry is much more diverse and often commoditized, featuring a wide range of manufacturers that produce items such as printed circuit boards, electronic displays, resistors, capacitors, and switches.