US chipmakers hit by sudden slowdown after pandemic boom – The Irish Times
After facing booming demand and global shortages since the start of the pandemic, the semiconductor industry is facing a sudden downturn.
But even for an industry accustomed to frequent cyclical downturns, this one has defied easy analysis and left researchers struggling to predict how the setback will unfold.
The sudden glut of memory chips, PC processors and some other semiconductors came at a time when manufacturers in many automotive and industrial markets still lack a reliable supply of chips.
It has also forced some of America’s biggest chipmakers to cut billions of dollars from planned capital spending, just as Washington passed long-awaited legislation to subsidize a massive increase in domestic chipmaking capacity. .
The speed of the turn and the conflicting forces at work are unprecedented, said Dan Hutcheson, the veteran managing director of VLSI Research who has been analyzing chip cycles since the 1980s.
“I’ve never seen a time when we had excess inventory and we had shortages,” he said.
The immediate cause has been a rapid inventory build-up in the chip supply chain since the start of this year. Compared to February, when there were enough chips available to support around 1.2 months of production, global inventory levels jumped to 1.4 months in June and then to 1.7 months in July, according to VLSIResearch.
Falling PC sales and lower demand for smartphones have been the main causes, as consumers become entrenched. But with growing fears of an economic slowdown, makers of a wide range of equipment, which had been stockpiling to make themselves more resilient to supply pressures, backtracked. Meanwhile, it’s unclear to what extent the weakening in chip sales reflects supply chain issues, rather than a drop in demand.
The suddenness of the turn has ricocheted through the sector since late July, when Intel stunned Wall Street on learning that revenue in its last quarter had fallen by $2.6 billion (2.5 billion euros), or 15 %, below expectations.
General Manager Pat Gelsinger blamed it on the kind of inventory adjustment that only happens once a decade, though Intel also admitted to its own mistakes.
Nvidia, the largest maker of graphics processing units, or GPUs, used in video graphics and machine learning systems, pre-announced an even bigger revenue loss last week, sales of its graphics chips. game having fallen by 44% compared to the previous quarter.
And Micron, one of the biggest memory chip makers, said its free cash flow was likely to turn negative over the next three months, after averaging $1 billion in recent quarters.
Tensions have also been felt across Asia. Late last week, the chief executive of Chinese chipmaker Semiconductor Manufacturing International Corporation said demand had slowed for smartphones and other consumer electronics markers, with some orders ceasing altogether.
A month earlier, Taiwan Semiconductor Manufacturing Company said it expected an inventory correction that would last until the end of next year.
The steep drop left chipmakers in the United States trying to manage a decline just as they set the stage for a massive increase in production due to the $52 billion government support provided by the Chips Act of this this month.
On the same day Congress passed the law, Intel, which is expected to be the biggest recipient of government subsidies, cut $4 billion from its capital spending plans for the rest of this year, despite saying that it was still committed to a “strong and growing dividend” for its shareholders.
Meanwhile, Micron, which celebrated President Joe Biden signing the legislation last week with the announcement that it plans to invest $40 billion in the United States by the end of the decade, was forced just a day later to say it would cut capital spending “significantly” next year due to the recession.
For now, most chip supply chain experts are predicting a relatively mild downturn, provided the global economy heads for a soft landing. But the speed at which things turned left them struggling to understand the complex dynamics at work.
Gartner, which expected global chip sales growth to halve this year from 26% in 2021, further cut its forecast to 7% and now expects a 2.5% contraction in 2023 at $623 billion.
For now, Wall Street has taken the news at its own pace. The Philadelphia Semiconductor Index, which includes the 30 largest U.S. companies involved in the design, manufacture and sale of semiconductors, fell nearly 40% as the stock market corrected this year after tripling following the onset of the pandemic stock market crisis.
But since early July, despite mounting evidence of a flea slowdown, the index has rebounded 24%.
On Monday, Nvidia shares rallied above where they were trading before its earnings disappointment, even as it revealed a huge 17% shortfall from previous expectations.
But after the severe inventory and supply chain strains of the past two years, few analysts are confident they can judge how an economic downturn will affect the industry. Hopes that the decline would be largely limited to the PC and smartphone markets have already been dashed.
While collapsing demand in the gaming market was the main cause of Nvidia’s earnings disappointment, the US chipmaker also said its data center chip sales were up just 1% compared to the previous three months, compared to Wall Street expectations of closer to 10 percent.
He blamed supply shortages rather than falling demand, although other indications, including a drop at Intel, fueled suspicions that the booming cloud computing market has cooled rapidly.
In recent days, the signs of a pullback have widened. Micron Chief Financial Officer Mark Murphy said last week that industrial and automotive customers were the latest to cut chip purchases.
“This is a very recent development,” he added, making it too early to tell whether these customers are simply adjusting after a rapid build-up of inventory or reacting to lower demand for their own customers.
Either way, according to Murphy, the result was the same: “We are seeing clear signs of weakness in these markets.” —Copyright The Financial Times Limited 2022