The semiconductor industry has been on a remarkable upswing since the start of the year, with DeepSeek emerging as a hot topic in discussions about the marketAs the global semiconductor industry experiences a recovery phase, the surge in demand for artificial intelligence (AI) technology has become the focal point of interestAnalysts and industry stakeholders are keenly watching how AI-driven requirements will positively influence semiconductor demand growth.

At the forefront of semiconductor manufacturing lies wafer fabrication, which is the critical upstream segment of the production processThe degree of capacity utilization and the capital expenditure trends of leading companies serve as indicators of the industry's cyclical recoveryTraditionally, the semiconductor sector operates on a four to five-year cyclical basis, where periods of growth and decline correspond with various developments in the market

In previous cycles, explosive demand for consumer electronics like PCs and smartphones played a key role in driving up demand at the peak of each cycle.

As we look towards 2024, the continued recovery of the semiconductor market is largely buoyed by the incremental demand generated by AI applicationsCompanies like Taiwan Semiconductor Manufacturing Company (TSMC) have reported substantial shifts in their operational metrics, reflecting the increasing need for advanced manufacturing processes to cater to AI technologiesThe market has high expectations about the performance of firms in the coming quarters, especially after the recent record highs for shares of key players like SMIC (Semiconductor Manufacturing International Corporation). Investors are particularly focused on the upcoming earnings announcement, anticipated later this month, to gauge how much the company will capitalize on the ongoing AI wave.

As the demand for advanced processes soars, the wafer foundry industry is also on a trajectory for considerable growth

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This sector is crucially tied to the health of the semiconductor industry, showcasing significant signals concerning cyclical trendsEstimates suggest that by 2024, the global foundry market will achieve a year-on-year revenue growth of 22%, indicating a pronounced recovery and expansion phase following the declines experienced in 2023. The demand for advanced manufacturing processes, particularly driven by AI applications in both data centers and edge computing, has been accelerating market growth.

According to a recent report by Counterpoint Research, the heightened interest in AI has substantially increased demand for advanced semiconductor processes, projecting a 20% year-on-year rise in global wafer foundry revenues for this yearNotably, TSMC’s performance is expected to exceed the overall growth averages of the industryTheir projected fourth-quarter revenue for 2024 shows a dramatic rise of 37% year-on-year, spurred by increased demand for their 3nm and 5nm process nodes, which collectively accounted for a remarkable 74% of their total revenue.

When diving deeper into specific applications, the revenue from high-performance computing (HPC) has surged by 19% quarter-over-quarter, representing a substantial 58% increase year-on-year and illustrating the tangible and robust nature of AI demand

The appeal of advanced foundry services is clear, especially since tech giants such as Google, Amazon, Meta, and Microsoft are expected to allocate hundreds of billions in capital expenditures to advance their technological platforms, primarily using 3nm, 4nm, and 5nm processes, which enable better energy efficiency and higher performance tailored to compute-intensive tasks.

Following the surge of interest in platforms like DeepSeek, noted for their cost-effective, high-performance, and open-source models, there are high hopes for the development of edge AI applications, including AI glasses, headphones, and toysThese consumer electronics typically utilize mature manufacturing processesHowever, the current rates of penetration for these AI-driven products remain insufficient to significantly increase the capacity utilization rates of matured fabrication processes.

Counterpoint Research has highlighted that as of now, the recovery of capacity utilization in mature process nodes (such as those of 28/22nm and above) is proceeding at a slower pace, and the outlook for 8-inch fabrication yields reflects a more sluggish rebound primarily due to their heavy application in automotive and industrial contexts.

Industry experts and analysts have noted that various categories of chips within industrial control and automotive sectors continue to grapple with inventory overhang, attributed mainly to the slow recovery in downstream demand

One semiconductor executive remarked, “The electric vehicle market is currently adjusting its inventory levelsIn past years, under the joint momentum of industry and capital expansion, some chip categories expanded their capacities without full demandWhether we can clear this inventory by 2025 will be crucial for the resurgence in utilization rates across relevant fabrication processes.”

As market dynamics evolve, the spotlight turns to companies like SMIC, which represents China’s pinnacle of wafer manufacturingTheir impending announcement on February 11 regarding the performance of Q4 2024 stirs excitement, especially following their previous quarter when revenues soared past $2 billion for the first time, setting a historical benchmark for the company with a 20.5% gross margin increase.

Amid earlier guidance indicating a minimal revenue change of 0% to 2% for the next quarter, analysts are paying close attention to how this aligns with the reported 90.4% average utilization rates in the last quarter

The sequential growth from 80.8% and 85.2% in previous quarters points toward a positive trend, albeit tempered by existing challenges.

Looking towards the semiconductor cycle trends in 2025, SMIC hinted at expectations for an increased chip demand compared to 2024, especially in the AI sector predicted to grow over 10%, while other sectors may see single-digit increasesNotably, many within the industry still regard the industrial and automotive segments as lagging, flagging their potential recovery in the latter half of this year as pivotal for broader performance across the semiconductor framework.

A recent report from Tianfeng Securities suggests that geopolitical uncertainties are redefining the semiconductor supply chain, leading to a tangible trend towards local production and usage to mitigate risksAs the leading domestic foundry, SMIC is poised to benefit from this shift, potentially exceeding market expectations with robust performance as AI demand continues to escalate

Speculations abound that the fourth-quarter earnings of SMIC may surprise positively, possibly offsetting seasonal downturns in Q1 of 2025.

On the secondary markets, SMIC’s H-shares have recently hit historical peaks, a reflection of investor confidence in the company’s capacity to thrive amidst AI-driven growth trendsOn February 7, the closing price for SMIC H-shares reached HKD 46.65, with an intraday high of HKD 49.15, both marking all-time highs since their listingSince October 2024, there has been an accumulated rise of 123.74% in their share prices, as SMIC has solidified its role as a leader in technology stock sectors following the bullish market trends.

In a broader context, this narrative illustrates how the interplay between advancements in AI and semiconductor manufacturing is not merely a trend but a pivotal shift forming the foundation for the future technological landscape