Insights

The IC distribution industry remains closely tied to the broader semiconductor cycle. Looking ahead to next year, several positive trends are expected to benefit the IC distribution sector, including1) an anticipated semiconductor market recovery in 2025, 2) Taiwan’s emergence as a key production hub for AI servers and edge AI, 3) expanding global operations driven by geopolitical concerns, and 4) a favorable low-interest-rate environment. We believe that Taiwanese IC distributors with extensive global reach and significant scale will stand out among global peers and benefit the most from these trends.

Semiconductor Market Recovery

The semiconductor market is expected to experience a recovery in 2025. This resurgence is anticipated to be fueled by advancements in generative AI, which are likely to drive demand for data centers and edge computing solutions. Additionally, the ongoing adoption of consumer electronics, such as smartphones and laptops, will continue to play a crucial role in boosting semiconductor demand. According to Gartner, the global semiconductor market grew from USD 476 billion in 2018 to USD 530 billion in 2023, reflecting a compound annual growth rate (CAGR) of 2.3%. This market is projected to further expand to USD 779 billion by 2028, with a CAGR of 9% from 2024 to 2028, underscoring the significant potential of the semiconductor industry in the years to come.

This optimistic outlook is particularly favorable for the Asia-Pacific region, which has been a major contributor to global semiconductor market growth and has established itself as a leading production base for electronic products. Benefiting from cost-effective, high-quality labor, advanced manufacturing capabilities, and a well-developed supply chain cluster, the Asia-Pacific region accounted for about 70% of global semiconductor sales annually from 2018 to 2023. With AI applications rapidly evolving and end-market demand recovering, the Asia-Pacific semiconductor industry is well-positioned to capitalize on new growth opportunities and reinforce its leading position in the global market.

Taiwan’s Supply Chain: A Beneficiary of the AI Trend

The surge in demand for AI servers has substantially benefited Taiwan’s manufacturing sector, with Taiwanese suppliers securing a significant share of AI server production orders, encompassing everything from foundries and IC packaging to components and assembly. Taiwan’s expertise in high-tech manufacturing, coupled with its robust infrastructure for producing servers and related components, makes it a pivotal player in the global AI server market. This growth is largely driven by the increasing adoption of AI applications, cloud computing, and data center services, all of which require high-performance servers.

In addition, an expected recovery in AI PC demand next year could provide further support to Taiwan’s supply chain. Taiwan’s industrial foundation was initially built around the PC manufacturing sector, and a resurgence in this market would be beneficial for key Taiwanese suppliers with extensive experience in PC production. As PC demand bounces back, companies across Taiwan’s supply chain, from component manufacturers to assembly providers, are well-positioned to capitalize on this renewed demand. Taiwanese IC distributors, as integral players in the semiconductor ecosystem, are also expected to benefit. Although the main AI chips, such as GPUs, are managed by U.S. fabless companies with end customers, the demand for peripheral ICs and components will likely be met by Taiwanese distributors, thanks to their geopolitical advantages and strong relationships with local suppliers and ODMs.

The Value and Services Provided by IC Distributors

IC distributors play a crucial role in the semiconductor supply chain, acting as intermediaries between IC/component suppliers, such as fabless companies, and manufacturers like ODMs and EMS providers. Their value lies in bridging service gaps where upstream IC manufacturers may lack the capacity to directly support downstream manufacturers. Distributors not only help upstream suppliers develop markets and expand customer bases but also provide real-time market insights. They offer comprehensive services to downstream clients, including technical support and global supply chain management.

In the broader semiconductor ecosystem, IC distributors support both upstream and downstream players by offering financing, marketing, technical assistance, inventory management, and supply chain operations. These services are particularly valuable in areas such as financing, customer development, and inventory management. Additionally, technical support further differentiates distributors from their competitors, as it enhances the overall efficiency and effectiveness of the supply chain.

• Financing Services:

IC distributors provide essential financing services between upstream and downstream companies, which is especially critical for small and medium-sized enterprises (SMEs). Often, payment terms from downstream manufacturers do not align with the payment conditions set by large IC suppliers. Distributors bridge this gap by offering flexible payment terms, allowing SMEs to manage cash flow issues and maintain smooth supply chain operations.

• Customer Development and Marketing: 

Distributors enable IC suppliers to access and serve smaller electronics manufacturers, which may not receive direct services from IC suppliers due to smaller order volumes. With extensive market coverage and flexible service models, distributors effectively reduce the cost for IC suppliers in developing and servicing smaller customers.

• Inventory Management: 

Distributors set up hub warehouses as regional logistics centers, providing flexible supply chain solutions. By managing inventory and understanding downstream stock levels, distributors help transfer inventory risk from IC suppliers or manufacturers to themselves, thereby increasing their value to both parties.

• Supply Chain and Logistics Management: 

With a global presence, distributors help customers develop customized supply chain strategies, reducing inventory management risks and improving operational efficiency. By leveraging global logistics capabilities, they can efficiently distribute products worldwide, significantly reducing shipping and logistics costs.

• Component Supply and Technical Support:

 Distributors play a vital role in sourcing specialized, obsolete, and hard-to-find parts. They provide market insights, helping customers choose the right components and ensure timely access to critical parts. Additionally, they offer technical support from product design to production, aiding customers in accelerating time-to-market and enhancing competitiveness.

“The Bigger, The Stronger” Nature of the IC Distribution Industry

The IC distribution sector is largely characterized by the concept of "the bigger, the stronger." Larger companies have established advantages in terms of scale, resources, customer base, and market position. Consequently, they can leverage these strengths to secure more business opportunities during upcycles or better withstand downturns through diversified customer and supplier bases, minimizing financial risk. Larger distributors are well-positioned to raise capital, negotiate better terms, and attract high-value clients, which enhances their resilience in a competitive market. A comparison between large and small distributors highlights the strategic benefits of scale in various aspects.

Seizing Growth Opportunities in Asia and the U.S.

The 2020-2022 chip shortage, particularly in the automotive and industrial sectors, along with global supply chain shifts and the growing variety of complex electronic devices, have created advantageous conditions for IC distributors. With expertise in inventory management, global logistics, and servicing fragmented markets, IC distributors have emerged as crucial players. While the IC distribution market accounts for only about one-third of total semiconductor chip sales, it is expected to grow at a faster rate than direct sales. 

According to Gartner, semiconductor resales through distributors are projected to grow at a 17% CAGR from 2024 to 2028, compared to a 3% CAGR for direct sales.

By region, Taiwan and the rest of Asia are expected to post strong CAGRs of 30% and 20%, respectively, from 2024 to 2028, largely driven by AI and high-performance computing (HPC) demand centered in Taiwan and capacity relocations to Southeast Asia. The U.S. and EMEA markets are also forecasted to outperform the global average with CAGRs of 19-20%. In contrast, China is expected to underperform, with a projected CAGR of 12%, likely due to a cautious outlook on China’s economic recovery.

In conclusion, the IC distribution industry stands at a pivotal point, with Taiwanese distributors particularly well-positioned to benefit from these trends. The industry’s growth will be fueled by advancements in AI and HPC, along with increasing regional diversification and evolving supply chain dynamics. As a result, we believe that well-established, globally connected distributors with strong financial health and comprehensive service capabilities will emerge as the leaders in this evolving landscape.