US chipmakers reel from sharp boom to bust

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© FT montage / Dreamtime / Unsplash

If Wall Street had any doubts about the speed at which the chip industry was turning into a bust, unexpected financial forecasts from companies like mobile chipmaker Qualcomm should put them to rest.

“It’s an unprecedented change in a short period of time,” Akash Palkhiwala, the company’s chief financial officer told analysts this month. “We’re going from a period of supply shortages to demand declines.”

Qualcomm has cut 25 percent of its revenue guidance for the current quarter as weaker consumer spending hit smartphone sales. The forecast comes as several leading chipmakers issued surprisingly weak sales and profit forecasts and hinted at a round of job cuts ahead.

Among those taking the ax to its forecast, AMD warned that processor sales for PCs this quarter would drop 40 percent from last year, with profit margins also surprisingly weak. Intel, which cut its revenue forecast again after a large reduction in the previous quarter, signaled thousands job Layoffs ahead and plans to cut as much as $10bn in costs by 2025.

A year ago, when stock prices peaked, it was easy to believe that the chip industry had entered a new era. Giant new markets are opening up “from mobile to cloud to electric vehicles to the metaverse,” Sanjay Mehrotra, chief executive of memory chipmaker Micron, said at the time. Supply chain problems have led to widespread chip shortages, driving up prices.

Asked in an interview with the FT whether the chip business is still vulnerable to the kind of vicious cycle that has always plagued it, Mehrotra said: “Our industry is different, and certainly Micron is very different.” But less than a year later, the chip cycle has returned with a vengeance.

In September, Micron warned that its revenue this quarter would fall to $4.25bn, down 45 per cent from a year ago. The company also said its gross profit margin would collapse from 46 percent to 25 percent. In response, it cut nearly half of its planned capital spending next year.

By early October, the Philadelphia semiconductor index had fallen 47 percent from its peak, compared with a 26 percent fall in the broader market. But since then, as the chip company has confirmed investors’ worries about the depth of the downturn, the index has rebounded 16 percent on the hope that the bottom of the sharp cycle can come into view.

For Wall Street, the severity of the sudden cyclical decline even foreshadowed last month’s action by the US for block sales of advanced chips and chipmaking equipment to China. The move, which is likely to drive the industry’s long-term sales growth, was barely mentioned in the latest round of earnings calls.

The the intensity of the recent downturn owes a lot to the inventory glut that is built up to a surprising speed. Booming demand for many digital products and services during the pandemic fueled the optimism of chip executives such as Micron’s Mehrotra, leading to predictions of a period of strong secular growth.

At the same time, chip shortages have led to deliberate inventory levels to protect against future supply shocks.

That leaves the industry vulnerable to the sudden turn that comes this summer. Sensing that consumer demand is weak, starting with PCs and smartphones, many hardware makers are taking steps to reduce their bloated inventories, halting new orders and sending chipmakers into a tailspin.

Other factors contributing to the oversupply include a jump in global chip manufacturing capacity. According to Dan Hutcheson, chairman of chip research firm VLSI, global wafer capacity – the silicon discs on which chips are etched – rose from 1.06bn square inches early last year to 1.22bn this September, well ahead of normal industry expansion rates.

The capacity could become a permanent feature in the market, said Pat Moorhead, an analyst at Moor Insights & Strategy.

US and EU efforts to reduce dependence on global supply lines are leading to a “balkanised” chip world, Moorhead said. With every large country or region looking to build enough excess capacity to protect itself from unexpected shocks, the excess could be structural, he added.

But an end to the first stage of a sharp downturn can at least come into sight.

Qualcomm last week predicted it would take the smartphone maker two quarters to burn off its excess inventory, with a low point in its sales in the current quarter. AMD also noted the potential clearing of excess by next Spring, pointing to a period of greater stability.

Some analysts also said that the surprising severity of some of the latest forecasts, which were also below the expectations of Wall Street, suggested the bottom of the market may be close.

“We’re getting to the point of capitulation,” Hutcheson said, referring to an apparent willingness by chip companies to throw in the towel and write off some of their own excess inventory.

A sharp downward correction, though, would still leave the industry vulnerable to a broader weakening in the global economy, with hopes of a recovery in chip demand in the second half of next year at stake.

Global chip sales could fall anywhere from 6-20 percent for the year as a whole, according to VLSI forecasts — though as severe as this year’s decline has been, even predictions with such a wide range can miss.

Demand is still red-hot in some chip markets, according to executives in companies that have reported new earnings. Auto companies top the list, as supply shortages continue and demand rises for electric vehicles and more sophisticated driver assistance systems.

The recent spurt in capital spending by the biggest tech companies also ensured strong sales of chips for large-scale data centers. The shortage of analog chips – which are used in things like power supplies and sensors – also continues.

But some of the biggest markets for semiconductors are entering a different era. After booming during the pandemic when millions of people were forced to work and study from home, PC sales have fallen sharply, with many forecasts pointing to a 20 percent drop in sales this year, to around 275 million.

Sharp disagreement about the outlook for next year has highlighted the potential for further disappointment. Intel says that demand for PCs has increased permanently as a result of the pandemic, and last month issued a surprising forecast for sales of 270-295 million.

Rival AMD, on the other hand, is forecasting a further 10 percent drop – suggesting that sales could fall by around 250-255mn and take the PC industry back to pre-pandemic levels.

The latest round of quarterly earnings reports also revealed that the weakness first seen in consumer demand for PCs and smartphones has spread, with the gaming market, companies and industries all reportedly seeing a change in growth.

At the same time, Texas Instruments, which sells to a wider market than most chip companies, predicts that it will reduce demand from all of its end markets before the end of the year, except for automakers.

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