European Semiconductor Companies: AI vs. Other Markets -- A Tale of Two Demand Patterns

The European semiconductor industry is at a crossroads, with demand patterns diverging between the burgeoning AI market and traditional sectors. As generative AI applications like ChatGPT and Sora gain traction, the demand for specialized AI chips is surging, pushing the industry to innovate faster and produce more capable and efficient chips. Meanwhile, the semiconductor industry finds itself approaching a new S-curve, raising the question of whether it can keep up with the growing demand.

Leaders in the industry are responding by committing substantial capital expenditures to expand data centers and semiconductor fabrication plants (fabs) while concurrently exploring advancements in chip design, materials, and architectures to meet the evolving needs of the gen AI–driven business landscape. However, even the most ambitious scenarios for gen AI’s effect on the B2B and B2C markets involve a massive increase in compute—and thus wafer—demand, which could strain the industry’s ability to keep up.



To guide semiconductor leaders through this transformative phase, we have developed several scenarios for gen AI’s effect on the B2B and B2C markets. Every scenario involves a massive increase in compute—and thus wafer—demand, with even the most ambitious scenarios pushing the industry to its limits. These scenarios focus on the data centers while acknowledging that implications for edge devices such as smartphones exist but on a much smaller scale.

The demand scenarios, developed from McKinsey analysis, are based on the wafer output that the semiconductor industry could potentially deliver, given constraints such as capital and equipment. While even scenarios that are more ambitious are plausible, the implications for the required number of fabs and the energy supply necessary for the data centers will make them unlikely.

In conclusion, the European semiconductor industry faces a significant challenge in keeping up with the growing demand for AI chips while maintaining a strong presence in other markets. To capitalize on the growing demand for AI chips, European semiconductor companies must invest in R&D and innovation, expand into high-growth markets, form strategic partnerships, leverage government funding and initiatives, strengthen supply chain and manufacturing, and diversify their product portfolio. By implementing these strategic moves, European semiconductor companies can effectively navigate the diverging demand patterns and secure their position in the dynamic semiconductor market.