AI and Gen AI spark semiconductor demand explosion, but supply woes loom

The semiconductor industry is navigating a period of intense transformation as the adoption of artificial intelligence (AI) and generative AI (Gen AI) revolutionizes global technology demand. According to Capgemini Research Institute‘s report, The Semiconductor Industry in the AI Era: Innovating for Tomorrow’s Demands, downstream industries expect a staggering 29% increase in chip demand by 2026—nearly double the semiconductor industry’s forecasted growth. This disparity is underscoring the need for strategic innovation, not only in chip design and manufacturing but also in supply chain management and sustainability practices.

AI and Gen AI are reshaping global technology landscapes, driving demand for specialized semiconductors such as neural processing units (NPUs), high-performance graphics processing units (GPUs), and memory-intensive chips. However, the semiconductor industry faces a host of challenges, including geopolitical tensions, supply chain disruptions, and sustainability concerns. These hurdles must be addressed to fully capitalize on the immense opportunities presented by an AI-driven future.

The AI-Driven Surge in Semiconductor Demand

The widespread adoption of AI technologies is accelerating demand for custom semiconductors tailored to specific applications. Over 80% of downstream organizations anticipate their semiconductor needs to rise significantly within the next year, driven by applications in 5G, IoT, autonomous vehicles, and edge computing. The report emphasizes that the demand for AI chips, custom silicon, and memory-intensive solutions will remain a critical factor in the industry’s evolution.

To meet these demands, many downstream industries are turning to in-house chip design. This approach allows companies to create semiconductors optimized for their unique hardware and software ecosystems, safeguarding intellectual property and enhancing compatibility. The shift to custom chip design underscores the growing emphasis on innovation, efficiency, and control in semiconductor-dependent sectors.

Advances in Semiconductor Design and Manufacturing

The semiconductor industry is at the forefront of innovation, advancing cutting-edge technologies such as extreme ultraviolet (EUV) lithography, 3D packaging, and chiplet architectures. These advancements are not only driving efficiency but also pushing the boundaries of what is technologically feasible. According to the report, nearly half of semiconductor manufacturers are integrating AI and machine learning into their fabrication processes, streamlining production while reducing costs.

Despite these innovations, the industry faces significant obstacles, particularly in its supply chains. Geopolitical tensions and international trade restrictions are prompting a shift toward domestic sourcing and nearshoring. Over the next two years, the proportion of domestically sourced chips is expected to rise from 40% to 47%, with the United States and Europe leading investment efforts. These strategies aim to mitigate supply chain vulnerabilities while ensuring a steady flow of essential components.

Sustainability Takes Center Stage

Sustainability is emerging as a top priority for semiconductor manufacturers and their downstream partners. Over half of downstream organizations are placing eco-friendly practices at the forefront of their agendas. Key initiatives include energy conservation through the use of energy-efficient machinery, water recycling and reuse, and the reduction of hazardous chemicals.

For instance, many companies are adopting closed-loop systems for chemical reuse, minimizing waste and environmental impact. These efforts align with broader industry trends toward sustainability, reflecting a growing awareness of the ecological footprint associated with semiconductor production.

Security Challenges in a Complex Supply Chain

As supply chains become increasingly interconnected, cybersecurity has become a critical focus for semiconductor manufacturers. The report reveals that nearly 60% of design firms are prioritizing cryptographic protections, secure firmware integration, and hardware-based encryption to safeguard intellectual property. These measures are essential in protecting proprietary technologies and maintaining trust in a globalized and interdependent supply chain.

Opportunities for Strategic Growth

Capgemini’s report identifies several strategic opportunities for the semiconductor industry to navigate these challenges effectively. These include adopting next-generation fabrication technologies, fostering collaborations across industries, and aligning with regulatory frameworks to drive innovation. Brett Bonthron, Capgemini’s Global High-Tech Industry Leader, emphasized the importance of integrating software-centric solutions with sustainable manufacturing practices to meet the demands of emerging applications.

The adoption of specialized chips, such as NPUs and GPUs, is a clear signal of the market’s direction. With Gen AI driving computational demands, these chips are critical for managing large datasets and enabling advanced AI applications. By embracing innovations in AI-driven chip design and leveraging cutting-edge manufacturing methods, the semiconductor industry is poised to thrive in this transformative era.