• Futures News
• January 24, 2025

NVIDIA Supplier: AI Phones to Take the Lead

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As we navigate the unpredictable tides of the global semiconductor landscape, recent insights from Advantest's CEO, Doug Lefever, shed light on a potential beacon of opportunity amidst the uncertainty surrounding data center investments. His perspective reveals a juxtaposition of challenges and burgeoning potentials, particularly focused on the burgeoning demand for AI smartphones, which Lefever believes could shore up the semiconductor industry against a severe downturn.

Lefever's remarks, delivered on December 26, highlight a shifting paradigm in the technology sector. While major players such as Meta, Google, and Microsoft remain steadfast in their investment towards artificial intelligence, there are subtle indicators suggesting a slowdown in their data center expansions. This looming slowdown, although not of prolonged duration, can significantly impact the semiconductor supply chain, given the concentrated nature of the market dominated by large-scale data centers. Lefever expressed a cautious view of the market's cyclicality, hinting that a potential downturn could be particularly harsh once the cycle turns.

Despite this cautionary outlook concerning data centers, Lefever's optimism about AI smartphones creates an intriguing counter-narrative. Currently, the demand for AI-enhanced smartphones might appear moderate, yet he envisions a rapid surge in interest should a breakthrough application emerge that truly captivates users. He articulates this hope succinctly: “Everyone is holding their breath, waiting for that killer app in the AI smartphone arena. If such an application comes to light and users start switching their devices en masse, it could lead to explosive growth in the market.”

The competition in the AI smartphone segment is intensifying, with giants like Samsung launching their latest models equipped with various AI capabilities. Just recently, Samsung unveiled the S24 series, boasting features such as real-time translation, voice-to-text transcription, video searches, and enhanced photo editing. The pricing of these new smartphones in the U.S. ranges from $800 to $1300 as Samsung aims to revitalize the smartphone market and carve out a distinct identity from Apple.

Moreover, Google is also developing native AI technologies for its Pixel series, while notable Chinese brands including Honor, OPPO, and Xiaomi are intensifying their efforts to introduce AI-integrated smartphones as well. A notable report from Canalys predicts that AI functionalities are set to become critical selling points for future smartphones, with projections suggesting that 5% of smartphone shipments will incorporate AI capabilities this year, escalating to 635 million units by 2027, which constitutes 45% of the total smartphone market.

Nevertheless, the optimism surrounding AI smartphones is tempered by some analysts' reservations regarding their capacity to incite a mass smartphone replacement. Many contend that a number of the existing smartphones already integrate certain AI functionalities, which might render Samsung's newly introduced features insufficient to trigger a widespread switch among consumers. Park Kang-ho, an analyst from Daishin Securities, echoes a similar sentiment, arguing that the existing AI functionalities may not be compelling enough to drive consumers towards extensive upgrades. He does, however, suggest that a deeper interconnectivity between AI smartphones and other smart devices, such as automobiles and home appliances, could foster broader IT device demand, thereby stimulating overall market growth.

On the other hand, Advantest, a leading manufacturer of semiconductor testing equipment based in Tokyo, Japan, seems poised to benefit significantly from the burgeoning demand within the semiconductor sector. The company plays a pivotal role in providing cutting-edge testing equipment for graphics processing units, including those for renowned clients such as Nvidia. As semiconductor technologies continue to evolve rapidly, the demand for advanced testing devices has surged in parallel. Lefever maintains that as chips become increasingly sophisticated and costly, the demand for testing services is witnessing explosive growth.

In recent years, Advantest has displayed outstanding performance, with its share price appreciating by over 80% within the last year and nearly 500% over the past five years. This substantial increase highlights the market's robust recognition of Advantest's leadership in the semiconductor testing field. Despite Japan having lost its leading position in global chip production since the 1980s, manufacturers like Advantest remain integral to the global semiconductor supply chain. Although these companies cater to specialized niches, their products and services play a crucial role in the seamless functioning of the semiconductor industry.

Lefever underscores the significance of rigorous testing processes in modern advanced chip production, pointing out that each chip typically undergoes multiple testing phases before it reaches the assembly stage, frequently involving as many as 10 to 20 tests. This number has seen a considerable rise over the past five years from previously single-digit figures. This shift underscores the escalating importance of quality control in chip manufacturing, which, in turn, has bolstered the demand for testing equipment.

Another facet propelling Advantest's market growth is the extended testing durations associated with modern chip designs. For instance, Nvidia's latest Blackwell product necessitates testing times that are 3 to 4 times longer than those for its predecessor, indicating a trend toward greater complexity in chip design and manufacturing, necessitating a more thorough and time-consuming testing process.

In light of the robust demand for semiconductors, Advantest has upwardly revised its performance outlook for the fiscal year 2024, forecasting a 16% increase in net profit to reach 122 billion yen (approximately $792 million). Lefever expressed confidence in future demand, especially within AI-related domains, asserting that ongoing technological breakthroughs will continue to propel growth in the semiconductor testing equipment market.

The confluence of challenges and opportunities in the semiconductor and AI smartphone markets embodies a rich narrative of innovation and adaptation. As tech companies strive to maintain their foothold in an increasingly competitive landscape, the focus now shifts to how effectively they can leverage advancements in AI to not only rejuvenate the smartphone market but also sustain the overarching semiconductor ecosystem.