Q1 2025 semiconductor market decline: Seasonal adjustment or sign of technical recession?

Major semiconductor companies generally expect revenue to decline, with an average drop of approximately 9%, significantly exceeding the historical average of 5%. To determine whether this is a temporary adjustment or a sign of a deeper downturn, we reviewed past semiconductor market troughs and believe that demand in Q1 2025 remains stable. Key factors influencing the semiconductor industry this year include demand for AI servers, corporate IT spending, and developments in the Chinese market. Overall, while the global semiconductor market may face growth deceleration, it is expected to maintain an upward trajectory. Even in a worst-case scenario, a full-scale recession is unlikely.

According to SemiWiki, the global semiconductor market reached $170.9 billion in Q4 2024, showing a 17% year-on-year growth and a 3% quarter-on-quarter increase. The total market size for the year is projected at $628 billion, up 19.1% compared to the previous year. Looking ahead to Q1 2025, major semiconductor companies are expecting a general decline in revenues due to seasonal factors, inventory excess, and economic uncertainties, with an average decrease of around 9%. Nine companies, including SK Hynix, Qualcomm, and AMD, expect revenue growth, while seven companies, including Infineon and Renesas, anticipate declines. Furthermore, the market growth forecast for 2025 ranges from 7% to 15%, with AI servers being the primary growth driver. However, weak demand from smartphones, PCs, automobiles, and industrial sectors, along with global economic risks (such as potential U.S. tariff hikes), could further impact market performance.

Our Analysis

Historical data shows that in the past decade, the global semiconductor market has experienced a decline in Q1 nine times, with an average decrease of around 5%. However, the expected 9% decline in Q1 2025 far exceeds the historical average, suggesting that this downturn may not just be a seasonal adjustment but could signal the onset of a technical recession in the semiconductor industry.

To better assess whether the Q1 2025 downturn is a short-term adjustment or a sign of deeper recession, we will review several recent semiconductor market downturns, analyzing the primary factors and demand shrinkage patterns. As shown in Table 1, we have summarized semiconductor market recession scenarios from key periods such as 2011-2012, 2015-2016, 2018-2019, and 2022-2023, along with their underlying causes and demand trends, providing a comprehensive basis for judgment.

Table 1   Key factors and demand patterns behind recent semiconductor market downturns

Source: Researcher and Research

Based on this analysis, we believe that the Q1 2025 downturn is more likely to be a short-term demand contraction. The key drivers for the future development of the semiconductor industry will be AI server demand, corporate IT spending, and the Chinese market, which are crucial factors influencing industry trends in the coming year.

Key factors for 2025 Q1 semiconductor industry demand and future development:

1. AI server demand

AI server demand will be the key driver of semiconductor industry growth in 2025. In 2023 and 2024, AI server demand supported growth in the wafer foundry and overall semiconductor industries. However, if the growth rate of demand drops below 10%, it could negatively affect the supply chain for wafer foundries and servers, possibly leading to a price downturn in the DRAM and NAND markets.

This means that the continued large-scale investment in AI servers by cloud service providers like AWS, Google Cloud, Meta, and Microsoft will be a critical indicator for the future of the semiconductor industry. If these companies’ IT capital expenditures slow down, orders for high-end HPC GPUs (such as NVIDIA’s H100 and B100) could decrease, reducing the utilization rate of TSMC’s CoWoS advanced packaging capacity.

Currently, Amazon, Microsoft, Google’s parent company Alphabet, and Meta are expected to spend over $320 billion in capital expenditures, a 30% increase over the $246 billion estimated for 2024. Although Microsoft has recently canceled some data center leases, it still plans to invest more than $80 billion in FY 2025 (down from an originally planned $85 billion). Additionally, NVIDIA’s data center business is still showing strong growth, and TSMC’s CoWoS capacity demand remains tight, suggesting that the AI server market demand remains optimistic. Therefore, AI server demand will be the pillar of the semiconductor industry in the short term and will determine whether Q1 2025 will experience a temporary decline.

2. Global corporate IT spending

Global corporate IT spending is another key factor influencing semiconductor industry development in 2025. Corporate IT spending directly impacts demand for servers, PCs, enterprise SSDs, and enterprise GPUs, thus driving the overall semiconductor market. Server chips (e.g., Intel, AMD, Ampere), enterprise SSDs (e.g., Micron, Samsung, SK Hynix), and networking equipment (e.g., Broadcom, Marvell, Cisco) are all affected by fluctuations in corporate IT budgets.

When corporate IT budget growth is below 3%, semiconductor market demand typically slows down. Therefore, while market research firms provide forecasts, these data may not immediately reflect changes in corporate IT spending. Observing the capital expenditure growth rate of major cloud providers is a key indicator; if this growth rate drops below 5%, it may signal a conservative approach in corporate IT spending, negatively impacting the semiconductor market.

According to Gartner’s forecast, global corporate IT spending will grow 9.8% year-on-year in 2025, reaching $5.6178 trillion. At the same time, the capital expenditure growth rate of major cloud providers is expected to continue at 30%. These figures suggest that while there may be some uncertainty in the short term, global corporate IT spending remains at a high level, helping to support semiconductor market demand.

3. China Market

The China market plays a critical role in global semiconductor demand, especially in sectors like PCs, smartphones, and servers. As one of the main markets for these products, the recovery of China’s market will be a key factor influencing the global semiconductor industry in 2025. If the Chinese economy recovers, demand in consumer electronics and cloud markets could significantly rebound, driving semiconductor demand. However, a continued economic weakness in China may lead to a market downturn similar to the 2015-2016 period.

Key indicators to observe include China’s GDP growth rate, the manufacturing PMI (Purchasing Managers’ Index), and whether the government introduces large-scale infrastructure or subsidy policies. Additionally, changes in the local smartphone market and capital expenditure growth among Chinese cloud companies (such as Alibaba, Tencent, and Baidu) are crucial reference points.

China’s PMI for January 2025 was 49.1, below the expected 50.1 and the previous 50.1, indicating weakness in the manufacturing sector. Although the National Bureau of Statistics has not yet released GDP forecasts for 2025, the IMF predicts China’s economic growth will reach 4.6%. The World Bank has also raised its forecast for China’s growth in 2025 to 4.5%, an increase of 0.4 percentage points from earlier projections.

Although a PMI below 50 and a GDP growth forecast under 4.5% typically indicate soft consumption in the Chinese market, the Chinese government’s proactive measures to promote semiconductor self-sufficiency and investments in related fields are expected to stimulate market demand, especially in telecommunications, industrial, and automotive sectors. Therefore, despite uncertainties in China’s economy, the semiconductor market still holds growth potential under the right policy-driven conditions.

Summary

Given current market trends, AI server demand remains strong, global enterprise IT spending stays high, and Chinese government support policies will drive semiconductor market growth. Considering these factors, the semiconductor market demand in Q1 2025 is expected to remain stable.

Despite uncertainties such as global economic fluctuations and policy changes, demand-side growth, particularly in AI servers and enterprise IT spending, suggests the semiconductor market will continue to develop steadily. China’s market, under policy leadership, may maintain some growth momentum, further supporting global semiconductor demand. Although growth rates may slow, the overall market still holds potential for growth.

Looking at the full year outlook, even in the worst-case scenario, the global semiconductor market may face challenges with slower growth, but it will continue to experience positive growth.

Outlook

Market demand remains highly uncertain. On the supply side, the U.S. “America First” policy will push governments worldwide to increase support for their domestic semiconductor industries, fostering regional development of the global semiconductor sector.

Historically, the semiconductor industry has relied on globalized supply chains to increase efficiency and reduce costs, with clear divisions of labor in design, manufacturing, and testing across countries. However, as nations enhance policy support for their domestic semiconductor industries (such as subsidies, tax incentives, and infrastructure support) to ensure the autonomy of key technologies, semiconductor production may increasingly cluster within regions, altering the traditional global supply chain structure.

This shift may disrupt traditional industry cycles, leading to longer supply chain adjustments, increased costs, and changes in market competition. For example, companies that once relied on overseas foundries may be forced to find new production partners or even establish domestic production capabilities, increasing the pressure on technology and capital investments. Furthermore, regional development could raise trade barriers, further impacting market liquidity and increasing business risks.

This article is part of our Taiwan Tech and Market Shifts series.
It explores how Taiwan’s tech industries are adapting to global shifts in supply chains, manufacturing, policy, and innovation.

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