SEOUL - Signs are piling up that the tech downturn may be deeper and longer-lasting than feared.
After years of record capital spending, chipmakers are warning on a weekly basis that demand is sputtering. In the latest sign of trouble, Samsung Electronics and Advanced Micro Devices reported disappointing results within hours of each other that widely missed projections.
Samsung - the world's largest memory chip maker - reported a 32 per cent dive in operating income, while PC-processor maker AMD said it will miss its earlier forecast by about US$1 billion (S$1.4 billion).
Those numbers followed grim comments from memory makers Micron Technologies and Kioxia Holdings, which are slashing spending and output in a bid to stabilise plummeting prices.
AMD shares fell, spurring losses in chip gear suppliers from Tokyo Electron to client PC makers including Lenovo Group on Friday. Disco Corp, whose equipment grinds, polishes and dices chips, tumbled 7.1 per cent - losing the most ground in almost 16 months.
"It seems end demand has likely deteriorated markedly in recent weeks, and end customers appear to be aggressively draining inventory," Bernstein senior analyst Stacy Rasgon said. The cut in AMD's client revenue "is admittedly a bit breathtaking".
Weaker-than-expected demand for consumer electronics is hitting companies along with surging shipping and materials costs. Cost-cutting has become the new norm across the tech industry, and businesses that hoarded chips during the pandemic are now opting to cancel or postpone orders and tap inventory.
The semiconductor industry is also grappling with export restrictions from the United States government, which is ratcheting up pressure on its allies to prevent shipment of cutting-edge chips to a growing list of Chinese companies as it seeks to contain the Asian country. This is hampering business for chipmakers from AMD to Nvidia in the world's biggest semiconductor market.
Supply and demand are not all that is behind the current downcycle, said Midas International Asset Management chief executive Heo Pil-Seok. "The US government's export controls will further limit IT companies' sales in China and a large chunk of demand for chips will be weakened. If AMD and Nvidia cannot sell their chips in China, memory makers' earnings will deteriorate further."
The PC segment, which has for years been losing ground to smartphones, looks particularly vulnerable. But a serious recession would hammer demand even in areas that have remained solid, such as in cloud computing, automotives and factory automation.
"We would continue to stay away from PC-centric names, which within our coverage list include AMD, Intel and Nvidia, due to a likely prolonged PC downturn into next year and continued weakness in consumer gaming," Baird analysts Tristan Gerra and Tyler Bomba wrote in a note to clients.
Share prices dropped throughout the semiconductor supply chain, from materials makers like JSR to chip gear makers such as Advantest and Screen Holdings. Even silicon wafer makers such as Shin-Etsu Chemical and Sumco fell.
The companies themselves are bracing for a prolonged downturn. Samsung's chip business head, Mr Kyung Kye-hyun, said last month he does not see the memory market rebounding throughout next year.
Mr Kyung told employees at an internal event that Samsung cut its guidance for chip sales in the second half of this year by 32 per cent compared with a forecast in April, according to the Korea Economic Daily.
"No party lasts forever. It is a cyclical industry," said Mr Rasgon, noting that there were "a few years of very, very strong growth" that prompted companies to ramp up capacity.
"You build supply for demand that turns out not to be as real as you thought it was." BLOOMBERG
