Edgewater Research Company’s Dennis Reed walks readers through the latest market research, including sector analysis across compute, automotive and industrial.
From a top-down perspective, 2024 marked a recovery for the semiconductor industry, with World Semiconductor Trade Statistics (WSTS) projecting 16 per cent total sales growth following an eight per cent decline in 2023. While the rebound in sales is indeed encouraging, the recovery has been uneven across subcategories with the WSTS forecasting 77 per cent growth in memory and 11 per cent growth in logic driven by a strong recovery in memory pricing and artificial intelligence deployments.
The growth in logic is notable, with the leading AI processor company expected to grow ~113 per cent in 2024 to nearly $123 billion in sales. Excluding memory and the leading AI processor company, 2024 looks much different with broadline semiconductor suppliers experiencing sales declines of 5 to 35 per cent plus in 2024. As shown in the accompanying charts, Compute Semiconductor suppliers have surpassed previous peak sales levels, while High-Performance Analog Suppliers remain well below peak levels, with a muted recovery expected through 2025.
How much inventory was actually built and more importantly when does the industry return to shipping to consumption?
With the shortage and Covid-induced supply chain crisis firmly in the rearview, most companies—excluding the leading AI processor and memory suppliers—have seen rapid sales declines, with revenues largely returning to pre-COVID levels post-correction. For broadline suppliers, sales grew 30 per cent plus from trough to peak, well above historical norms, driven by allocation, non-cancelable/non-returnable (NCNR) agreements, long-term supply agreements (LTSAs) and pricing dynamics. This surge has left supply chain inventories stubbornly high, leaving suppliers, distributors, etc attempting to discern one of the more challenging questions in the industry: how much inventory is the end customer holding?
While the industry’s long-term growth prospects remain robust at a six to eight per cent CAGR, we argue the surge during the supply chain crisis was primarily a temporary anomaly fueled by the aforementioned factors. As highlighted in the chart below, we have modeled ‘real demand’ at seven per cent, contrasting it with WSTS-reported sales (excluding memory and the leading AI processor) to account for the impact of the AI surge, which skews a small subsegment. Our analysis suggests that pricing, NCNR/LTSA programs and likely demand pull forward accounted for as much as $74 billion in excess demand during the peak shortage of 2022.
Navigating the downturn, it’s evident the industry built significant inventory, raising the question: What does inventory heading into 2025 look like and how will it impact sales growth? Here, understanding the aggregate inventory build is critical. We estimate the industry accumulated nearly $138 billion in inventory by the end of 2023, burning through $30 to 31 billion in 2024. Entering 2025, based on WSTS forecasts excluding memory and the leading AI processor company, we estimate the industry holds approximately $107 billion in inventory—roughly one inventory turn. Using this as the foundation for our top-down estimates, we subscribe to the view that inventory will remain a headwind 1H25, with normalization toward historical growth levels expected by 2H25 and into 2026.
End market outlook—Compute
Perhaps no other end market illustrates the demand pull-forward scenario better than the Compute marketplace. Historically, the PC market averaged 275 million units annually, before surging to 330 million units at the peak of the supply chain crisis. While this spike was real, it primarily reflected a pull-forward of future demand with more than 100 million units of over shipped between 2020 and 2022, contributing to lower growth rates and reduced unit sales in 2023. In our view, the PC market remains structurally mature, with steady annual demand of ~275 million units and periodic fluctuations driven by new operating systems and enterprise refresh cycles. To date, AI-based PCs have not significantly impacted demand, as enterprise and consumer markets have yet to find compelling use cases. As a result, the near-term outlook of PCs and component suppliers that service this market is steady growth as the industry continues to recover from the Covid-era demand pull-forward.
Server units peaked in 2022 at nearly 13 million units before falling almost 13 per cent in 2023, despite the rise of AI. Historically, server shipments have been driven by cloud/hyperscaler capex and enterprise on-premises IT investments. While AI has created new market opportunities with impressive growth, it is clear that capex has proven finite and AI server units have largely come at the expense of traditional x86 infrastructure. This shift has forced the supply chain to manage IT investments now split between on-premise, cloud, and AI. AI infrastructure buildouts are unlikely to slow in 2025 but growing questions around monetization are leading the market to focus on finding application solutions that can justify the infrastructure investments of recent years.
End market outlook—Automotive
2024 ended up being a disappointing year for the automotive supply chain, with OEMs and Tier 1 suppliers in the West increasingly resorting to layoffs and factory shutdowns in response to slower demand and competitive challenges in the EV market. The US 2024 SAAR (seasonally adjusted annual rate) finished in line with expectations, though at the lower end of the 15.5 to 16 million forecast.
Beyond the SAAR, EVs faced significant setbacks, with 20 to 30 per cent of all EV programs either delayed or canceled, as OEMs confronted: slower consumer adoption after the early adoption phase; uncompetitive or unappealing product offerings; and high interest rates and EV prices dampening consumer demand. While the weak EV performance is concerning, stronger results in hybrids and internal combustion engine vehicles—particularly early in the year—helped support the overall SAAR. Despite challenges in the West, China remains a bright spot in the automotive market, with local OEMs extending their lead in EVs and continuing to expand globally.
The outlook for the automotive industry in 2025 is mixed. The US SAAR is forecasted to remain flat to slightly down, in the range of 15 to 15.5 million units, with EV growth expected but at a significantly slower pace compared to recent years. The industry is also likely to enter the year with elevated dealer-level inventories and ongoing excess component inventories. In the medium to long term, the core drivers of the market remain intact, including continued migration to hybrids, steady (though slower) EV growth and ongoing electrification and electronification, supporting a six to eight per cent increase in component demand. In the near term, cyclicality and inventory management are expected to be the key factors influencing the market in 2025. We anticipate the industry will be in a better inventory position ahead of the 2026 model-year introductions in the third quarter.
End market outlook—Industrial
Fundamentally, the long-term growth drivers for industrial electronic component manufacturers and distributors remain intact. Key factors such as robotics, automation, electrification, energy efficiency and improved HVAC systems are expected to continue driving high-single-digit CAGRs over the foreseeable future. However, in the near term, the cyclicality of the industry is dampening growth rates. Inventory destocking, particularly due to NCNR/LTSA programs from several suppliers, has led to significant underperformance, with the majority of component vendors experiencing high-single to low-double-digit sales declines in 2024.
While progress has been made in reducing inventory levels from their peak—publicly traded distributors reporting eight to 10 per cent declines in inventory dollars and over five per cent reductions in days on hand (DOH)—inventory remains stubbornly high across most regions. Inventory dollars are still 85 per cent plus above 2020 levels, and DOH is 15 per cent above pre-Covid levels, indicating that inventory overhang continues to weigh on the sector.
Geographically, in 2024, the industry likely found a bottom in Asia and the Americas, with inventory and demand showing signs of stabilization. However, the industrial markets in EMEA (Europe, the Middle East and Africa) remain more challenging. In particular, the automotive sector in Germany is facing significant headwinds, which are impacting the broader European industrial base. This will likely continue to pose a challenge for the industrial business throughout 2025. In contrast, outside of EMEA, there are clearer signs of recovery. In Asia, particularly China, the inventory drawdown appears largely complete by 2024, though recovery has been muted due to broader macroeconomic headwinds. Meanwhile, in the Americas, ordering patterns have stabilized at lower levels, suggesting a steadier, albeit cautious, outlook as the industry moves into 2025.
Looking ahead to 2025, the industrial outlook is mixed. Visibility for distributors and component suppliers remains limited, with supply generally considered available, backlogs low and the industry primarily focused on servicing turn-fill orders. The broader macroeconomic environment is also subdued, with most Purchasing Manager Indices (PMI) hovering slightly below 50, indicating mild contraction. Given this context, a cautious outlook is warranted, with a focus through at least the first half of 2025 on managing inventory levels down.
Once the cyclical inventory digestion process is complete, the industrial sector is positioned for a return to normal growth drivers in 2025 and beyond with factors such as the potential tariff implementation and ongoing efforts to diversify supply chains through nearshoring offering growth opportunities. While the cyclical nature of the industry will likely dampen any near-term recovery in early 2025, we expect a more moderate growth year overall, with relative strength in the second half of 2025 offsetting a more muted first half.
2025: transitionary year before growth returns
Entering 2025, growth is expected to be weighted toward the second half of the year. The outlook for 2025 shares similarities with both 2023 and 2024, with expectations for second-half growth helping to offset the inventory digestion expected in the first half. However, unlike the previous two years, moderating capital expenditures over the past two years, reduced utilization levels across the industry, and progress in inventory reduction across the supply chain are creating a more favorable supply-side dynamic as we enter 2025.
For semiconductors, we are forecasting an overall growth of 10 per cent in 2025 and five per cent ex-memory. Similarly, to 2024, we are forecasting outperformance in memory and logic, projecting plus 25 per cent and 10 per cent growth respectively driven by continued AI buildouts. Growth expectations for the broadline industry are more modest, with a flat to low-single-digit year-over-year growth forecast, before returning to more normalized growth rates in 2026.
The interconnect market enters 2025 in a more favorable inventory position than the broader semiconductor industry. This is primarily due to the fact that most interconnect suppliers did not enforce NCNR/LTSA programs and maintained a more balanced approach to pricing, in contrast to the aggressive pricing actions taken by semiconductor suppliers. As a result of this more favorable inventory environment and a reduced pricing headwind, we are forecasting the interconnect industry to grow by six per cent in 2025. Similar to the semiconductor industry, we expect the AI market to be a significant driver of overall growth, with more moderate growth anticipated in other end markets.