The sudden reversal of the global chip shortage

Semiconductor chips are seen on a circuit board of a computer on Feb 25, 2022. PHOTO: REUTERS

BEIJING (CAIXIN GLOBAL) - Remember the global semiconductor shortage a few months ago? It’s over.

Now, quickly shrinking demand for consumer electronics is causing cancelled orders and unsold stockpiles at makers of integrated circuits including Taiwan Semiconductor Manufacturing Co (TSMC), Advanced Micro Devices Inc (AMD) and Nvidia.

It’s a stark contrast with the disruptions that chip shortages caused for makers of autos, smartphones, computers and other goods that rely on the advanced electronic devices.

“This round of business sentiment is reversing so fast that chip designers were struggling to find production capacity only last year, but now they find chips won’t sell,” said analyst Xie Ruifeng from semiconductor industry market research institute ICwise.

The multibillion-dollar smartphone industry has cut at least three rounds of orders to chipmakers so far in 2022, a mobile industry veteran told Caixin.

Shrinking smartphone, PC demand

Global 5G smartphone shipments will shrink by as much as 150 million units in 2022, and demand for 5G phone chips will fall by 100 million to 120 million units, market research firm Strategy Analytics estimated.

Meanwhile, smartphone manufacturers are stuck managing high inventories. As at the end of June, global inventories of finished smartphones reached 200 million units, the mobile industry veteran estimated.

Many smartphone manufacturers built up six months of stockpiles based on 2021’s more optimistic expectations, Mr Xie said. Phone-makers also stocked up on components after experiencing chip shortages, with high inventories concentrated in the mid- to low-end 5G chips, said Mr Sravan Kundojjala, associate director of smartphone component technology services at Strategy Analytics.

Phone-makers have also accumulated huge inventories of components such as radio frequency chips. Mr Sravan projected that supplies could last until mid-2023. Demand for chips in smartphones and personal computers (PCs) accounts for more than half of global foundry capacity.

At present, automotive chips are still in short supply but account for less than 10 per cent of the total chip market. Smartphones and PCs have a decisive impact on the semiconductor industry, one analyst said.

The PC market also faces declining demand. Consulting group Gartner estimated that worldwide PC shipments totalled 72 million units in the second quarter of 2022, down nearly 13 per cent year over year – the sharpest decline in nine years.

Weak chip outlook

TSMC, the world’s largest contract chipmaker, faces reduced orders from four of its largest customers, reflecting slowing global demand. JPMorgan Chase said in a report in early September that AMD, Nvidia, Qualcomm and MediaTek slashed chip orders with TSMC.

While reporting a record quarterly profit surge for the July-to-September quarter last week, TSMC warned of a likely decline for the entire semiconductor industry in 2023 and cut its capital spending forecast by 10 per cent in 2022.

Other semiconductor companies are also facing tough conditions. AMD lowered its revenue forecast for the third quarter, citing significant weakening in the PC market. Intel, Nvidia and Micron Technology all issued subdued outlooks.

In the first half of 2022, macroeconomic headwinds and a number of “black swan” factors combined to cause consumer electronics demand to plummet, with smartphones and PCs bearing the brunt. Micron predicted that global PC shipments will decline by 10 per cent to 20 per cent in 2022, while the global smartphone market will decline by less than 10 per cent.

To reduce inventories, some chipmakers have begun slashing prices. After order cancellations from Samsung, Shanghai-based mobile chipset maker UNISOC may lower its prices by 20 per cent to 30 per cent in the second half, a semiconductor analyst estimated. For example, a UNISOC 4G smartphone chip that sold for almost US$17 (S$24) last year now costs about US$9.

Qualcomm will cut the price of its new generation of mid-range 5G mobile phone chips by 10 per cent to 15 per cent in the second half, and MediaTek will cut prices by the same among for several 5G chips, Isaiah Research estimated.

Where’s the bottom?

It is difficult to predict when the consumer market will bottom out and demand will rebound amid war, political turmoil and economic uncertainty.

The market is concerned that new capacity built amid a historic chip shortage since the second half of 2020 will gradually come online starting at the end of 2022. This means the global chip industry will enter a sustained period of overcapacity.

Wafer demand in 2023 is expected to be flat with 2022 or decline slightly, while capacity is expected to grow about 7 per cent in 2023, signalling oversupply, according to Mr Dale Gai, research director at Counterpoint Research.

However, Mr Gai said demand for advanced smartphone chips continued to expand, reflecting robust demand by high-end brands including iPhone. The overall industry might see demand bottom out in 2024, he said.

China’s resilience

China, however, presents a different picture. As the United States tightens sanctions on the country’s semiconductor sector, domestic chipmakers are accelerating efforts to develop alternatives.

The latest round of restrictions mainly targets advanced chips, which are generally characterised as having process nodes smaller than 28 nanometers. In semiconductor design, smaller process node sizes denote more-advanced technology.

Power management integrated circuit (PMIC) chips, which manage battery power charging and sleep modes and scaling of voltages down or up on electronic devices, don’t rely on advanced process nodes.

The PMIC market has long been dominated by global players including Texas Instruments and Infineon Technologies. Now, capacity is slowly shifting towards Chinese manufacturers, Mr Gai said.

In the long term, global wafer capacity is in tight balance or regional oversupply, but China is in short supply as expanding capacity is one of the country’s core objectives, ICwise’s Mr Xie said.

China’s wafer foundry expansion momentum has not slowed. In August, Semiconductor Manufacturing International Corp (SMIC) co-chief executive Zhao Haijun said at the company’s second-quarter earnings conference that the domestic contract chip industry still has great prospects.

“We will not change our plans for long-term capacity expansion and development,” he said.

In addition to expanding its existing 12-inch and 8-inch wafer production lines, SMIC is also building three new 12-inch wafer projects in Beijing, Shenzhen and Shanghai. Once completed, the company’s total capacity will double.

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