What to do about the slowdown in demand for data center chips? NVIDIA's supplier: AI phones will take over

In the context of a potential slowdown in global data center investments, the semiconductor industry is facing new challenges.

However, Doug Lefever, CEO of Advantest, a leading global chip testing equipment supplier for NVIDIA, stated on December 26 that the demand for AI smartphones could bring new growth points to the semiconductor industry, helping the sector avoid falling into a "vicious" recession.

Lefever pointed out that although large tech companies like Meta, Google, and Microsoft are maintaining strong investments in AI, there may be signs of a slowdown in their investments in data centers. While this slowdown may not last long, any deceleration could have a significant impact on the semiconductor supply chain due to the high market concentration of hyperscale data centers. Lefever emphasized that although he is reluctant to use the term "bubble," cyclical fluctuations could intensify, and if the next cycle arrives, it could be quite severe.

Despite the uncertainties surrounding data center investments, Lefever is optimistic about the prospects of AI smartphones. He believes that although the demand for AI smartphones is currently "a bit slow," it could take off rapidly in the future. He explained:

"Everyone is holding their breath, waiting for the killer application of AI phones to emerge. If such applications are born and users begin to replace their phones on a large scale, the market will see explosive growth."

Current Demand for AI Phones is Low

The competition for AI phones has already begun globally. On Wednesday, Samsung launched three new phones equipped with AI features: the S24, S24 Plus, and S24 Ultra. These phones come with a range of AI capabilities, including real-time phone translation, voice recording transcription, video search, and photo editing. The prices of these new models in the U.S. range from $800 to $1,300. Samsung is making bold attempts in the AI smartphone field, aiming to reactivate the smartphone market and differentiate itself from Apple.

In addition to Samsung, Google is also developing local AI technology for its Pixel series, while domestic manufacturers such as Honor, OPPO, and Xiaomi are actively launching smartphones equipped with AI technology. According to market research firm Canalys, AI features will become an important selling point for future smartphones, with 5% of smartphone shipments this year expected to have AI capabilities, reaching 635 million units by 2027, accounting for 45% of the total smartphone market.

Despite the buzz around AI phones, some analysts are cautious about whether AI features can drive a large-scale replacement of devices. Some analysts point out that most smartphones already contain certain AI functionalities, and the new features launched by Samsung may not be sufficient to trigger a massive replacement wave.

Park Kang-ho, an analyst at Daishin Securities, believes that the existing AI features may not be enough to stimulate consumers to replace their phones on a large scale. However, if AI phones can achieve deeper interconnectivity with other smart devices (such as cars, home appliances, computers, etc.), it could trigger broader demand for IT devices, thereby driving overall market growth

Advantest Benefits from Surge in Semiconductor Demand

Public information shows that Advantest, headquartered in Tokyo, Japan, is one of the world's leading manufacturers of semiconductor testing equipment, playing a key role in providing high-end graphics processing unit (GPU) testing equipment for companies like NVIDIA. With the continuous advancement of semiconductor technology, the demand for testing equipment has surged. Lefever emphasized that as chips become increasingly complex and expensive, the market demand for their services has exploded.

In recent years, Advantest has performed remarkably, with its stock price rising over 80% in the past year and approximately 500% over the past five years. This significant increase reflects the market's high recognition of the company's dominant position in the semiconductor testing field.

Although Japan has lost its leading position in global chip production since the 1980s, Japanese semiconductor testing equipment and materials manufacturers like Advantest still occupy a critical position in the global semiconductor supply chain. While these companies operate in relatively specialized niche markets, their products and services are essential for the smooth operation of the global semiconductor industry chain.

Lefever pointed out that in the production process of modern advanced chips, each chip requires multiple tests, typically needing at least 10 to 20 tests from wafer cutting to final assembly. Five years ago, this number was usually in the single digits. This trend highlights the increasing importance of chip quality control and drives the surge in demand for testing equipment.

Additionally, the extended testing times are also a significant factor driving performance growth. For example, the testing time for NVIDIA's latest Blackwell product is 3 to 4 times longer than that of the previous generation. This change indicates that chips are becoming increasingly complex in design and production, requiring more time for precise testing.

Benefiting from the surge in semiconductor demand, Advantest has also significantly raised its performance outlook for the fiscal year 2024. The company expects a 16% increase in net profit for fiscal year 2024, reaching 122 billion yen (approximately 792 million USD). Lefever stated, "We are confident about future demand, especially in the AI-related field, as technological breakthroughs continue, the semiconductor testing equipment market will keep growing."