Abrupt downturn hits US chipmakers as recession looms
Chipmakers are dealing with a well-known issue: growing inventory and declining demand.
A sudden slowdown caused by a drop in demand and excess inventory has struck the semiconductor sector - just as things were about to get better.
The semiconductor industry saw a tremendous surge in orders in the pandemic that drove sales and stock prices to record highs, causing a worldwide race to secure enough supply.
There was optimism that the boom would continue for many more years without a hard reversal, but chipmakers are now dealing with a well-known issue: growing inventory and declining demand.
In February, the global chip industry had enough inventory to manage around 1.2 months of production, according to VLSI Research. In June, the inventory level increased to 1.4 months, and to 1.7 months in July.
Dan Hutcheson, CEO of VLSI Research who has studied chip cycles since the 1980s, told the Financial Times that speed of the turn and the conflicting forces at play were unprecedented.
"I've never seen a time when we had excessive inventory and we had shortages," he said.
Hutcheson is referring to the fact that the industry has excess inventory of certain products, like memory chips and PC processors, but still lacks supply of industrial and automotive components.
The downturn has compelled some of the largest US chipmakers to cut billions of dollars from planned capital expenditures, just as White House enacted a long-awaited law to support a significant expansion in domestic chip production.
The USA passed the CHIPS Act earlier this month, promising $52 billion in government backing for domestic chipmakers.
Given the prospect of a recession and an increase in inventory, Citigroup analyst Christopher Danely said in a report that he and other analysts "continue to believe we are entering the worst semiconductor downturn in at least a decade, and possibly since 2001."
"We expect every company in our coverage universe and every end market to experience a correction."
Micron Technology issued a demand slowdown warning earlier this month, raising worries that the sector was ready to experience a painful slump.
That warning followed disappointing performances from AMD, Intel and Nvidia.
Micron said that orders have declined since the company's previous update more than a month ago, highlighting the pace at which demand is dissipating.
The demand for personal computers had already been weak, but the slowdown is now becoming more widespread.
Intel stunned investors last month when it revealed that its most recent quarter's sales fell $2.6 billion, or 15%, short of forecasts. The business reported its first quarterly loss in years in Q2, losing close to $500 million.
The major causes of the decreases, according to the firm, were lower demand for PC components and general economic downturns worldwide.
As sales of its gaming chips dropped 44% from the prior quarter, Nvidia, the world's largest GPU manufacturer, pre-announced an even greater revenue loss last week.
The Asian chip industry is also experiencing stress. Semiconductor Manufacturing International Corporation's co-CEO, Haijun Zhao, warned late last week that the demand from smartphones and other consumer device makers has slowed, with some of them completely ceasing orders.
Taiwan Semiconductor Manufacturing Company said last month that it anticipated an inventory adjustment that would run through the end of the next year.