Microprocessor market will bounce back

MPU demand will rebound in 2020 resulting in higher tags for processors used in computers and a return to sales growth

Weaker demand and oversupply will result in the global microprocessor market declining about 2 per cent in 2019 as revenue falls from $54.1 billion in 2018 to $53.25 billion in 2019, according to researcher Gartner Inc.

However, the MPU market will bounce back in 2020 when sales climb to $54.5 billion and continue to grow steadily through 2023 when revenue reaches $58.6 billion, the researcher said. Unit shipments will also rebound. Processor unit shipments in 2019 will fall to 486.9 million from 491.9 million in 2018. Shipments will rise to 500 million in 2020 and grow to 531 million in 2023, Gartner said.

Part of the decline in MPU revenue in 2019 is due to a weak PC market, which has been slowing for years. Despite slow growth in PCs, the MPU market had been growing steadily until 2018 because of strong demand for microprocessors used in servers for data centers run by hyperscale cloud providers such as Google, Amazon, Microsoft, Facebook and Alibaba and others, said Alan Priestley, research vice president for Gartner Inc.

“They account for a huge volume of product. What happened in the second half of 2018 and the first half of 2019, the hyperscalers’ slowed down their consumption” of servers impacting demand for microprocessors, he said.

“It looks like in the second half of this year server demand is coming back but for the total year, the microprocessor market will be down compared to 2018,” said Priestly.

He noted the MPU market is comprised of the computer segment, which includes servers, desktops, mobile computers, and the embedded market, which includes microprocessors used in other types of electronics equipment.

“The embedded market is a lot smaller part of the market,” said Priestly. In 2018, the embedded market totaled about $5 billion compared to $49 billion for the computer market, according to Gartner.

“The embedded market is more fragmented and is much more affected” by economic conditions, said Priestly. As a result, the embedded MPU business has slowed because of declining economic growth worldwide.

The server market is more affected by the large cloud computing providers, which had been increasing purchases of servers, resulting in robust demand for MPUs and is not as dependent as much on strong overall economic growth.

Mixed pricing scenario
Buyers who purchase microprocessors for embedded applications can expect modest price declines through 2023. For instance, the average price for an MPU used in an embedded system will drop from $23.70 in 2018 to $22.00 in 2019 and to $21.50 in 2021. However, the average price for an MPU used in servers and PCs will rise from $174.80 in 2018 to $176.35 in 2019, then increase steadily through 2023 when the average price will be $194.17.

MPU tags vary depending on the application performance level. For instance, the highest end Intel Xeon microprocessor for servers has a list price of more than $17,000, while a low-end Celeron processor lists for $42.

“The difference between these processors is core count,” said Priestly. Microprocessors used in high-end servers have 28 cores while low-end Celeron MPUs have two cores. The higher the number of cores, the greater the workload the processor can handle. “Some workloads need a lot of cores and some don’t,” he said.

The average price for server microprocessors will increase because server manufacturers will use more powerful, higher-performance microprocessors in systems. Such MPUs have higher prices and drive up the MPU average price. In fact, the long-term strategy of MPU makers Intel and AMD is to produce more processors in the mid-range and high-end, according to Shane Rau, research vice president, computing semiconductors for researcher IDC.

“That has had a positive effect to raise average prices,” he said. However, with demand being weaker than last year there has been some competition between Intel and AMD and “I’ve seen some pricing competition in the midrange and high-end,” said Rau. “In the second quarter, I noticed a notable sequential decline in processor ASP,” he said. However, it will likely be a short-term trend once microprocessor demand picks up.

Demand for MPUs will rise because server demand will increase next year. Server shipments will likely end 2019 rising about 1 per cent after growing 7.9 per cent last year. IHS Markit forecasts 8 per cent growth in server shipments in 2020.

Rau noted that microprocessors designed to be used in servers are used in other types of electronics equipment as well.
About 70 per cent of processors are actually used in servers, while the remaining 30 percent are used in other data center systems including storage, workstations and networking systems among others, he said.

More servers to ship
He said server processor revenue will decline 1.5 per cent this year to $19.6 billion but will grow 2.9 per cent in 2020 to $20.15 billion.

“Demand in 2019 was weak compared to 2018,” he said. In 2018, server processors grew 25 per cent because of robust demand by server manufacturers. But the very end of last year we noticed a significant slowdown in demand for server class components , including processors. That trend continued in the first half of 2019,” he said.

Enterprise OEMS and cloud service providers reduced their purchases of servers. Some companies were waiting for new server processors, such as Intel’s Cascade Lake Xeon processors and AMD’s new version of its Epyc processors.

There was expected to be a “significant increase in demand in the fourth quarter,” said Rau. That demand will carry over into 2020 and continue for several years. Rau expects server revenue to rise between 2.7 per cent and 4.1 per cent per year through 2023.

Also driving microprocessor demand over the next five years will be the growth of connected devices in Internet of things applications including the rollout of 5G technology, smart cards, artificial intelligence and machine learning techniques, said Vlad Galabov, principal analyst, data center compute and cloud research for IHS Markit. As a result, while the MPU market will decline in 2019, it will bounce back in 2020 and post a compound annual growth rate of 4.4 per cent through 2023, Galabov said.

The PC market will not be as much of a factor in MPU growth. “We expect a downward, sloping curve for the long run because the PC market is mature. People are doing more and more computing on their smart phones,” said Galabov.

Growth for application-specific MPUs
One segment of the MPU market that will contribute to microprocessor growth will be application-specific microprocessors. Revenue in the segment totaled about $1.3 billion, “so it’s quite small compared to the overall MPU market,” said Galabov. However, the segment will grow over the next five years. The compound annual growth rate for application-specific microprocessors will be 12.9 per cent,” said Galabov. They will expand beyond videogame consoles and will be used in automotive systems as well.

One unknown factor that could impact microprocessor sales, as well as sales of other semiconductors, is the ongoing trade dispute with China. Intel says rising trade tensions between the U.S. and China have led to increased tariffs and trade restrictions which have an impact on some of the chipmaker’s products.

“The U.S. has previously imposed, and continues to impose, restrictions on the export of U.S.-regulated products and technology to certain Chinese technology companies, which have included, and continue to include, certain of our customers,” Intel said in a financial filing. “These restrictions have reduced Intel’s sales and continuing or future restrictions could adversely affect our financial results,” the company said.

The restriction could result in some companies developing or adopt technologies that compete with Intel’s products, the company said.