Semiconductor: Once-in-demand chip makers face sudden challenges
Customers couldn’t get enough of the tiny wafers of silicon, which act as the brains of computers and are needed in just about any device with an on-off switch. Demand was so strong — and the United States’ reliance on a foreign manufacturer so worrisome — that Democrats and Republicans agreed in July on a $52 billion grant package that included grants to build new chip factories in America.
U.S. chipmakers such as Intel, Micron Technology, Texas Instruments and GlobalFoundries have promised huge expansions in domestic manufacturing, betting on a growing need for their products and the prospect of federal subsidies.
But lately, supplies of some semiconductors are piling up, which might be good news for consumers, but not for industry executives. Their bold investment plans come up against a sudden and unexpected slowdown in consumer demand for electronic gadgets, new US restrictions on sales to customers in China, rising inflation and the unusual prospect of a shortage. simultaneous use of some chips and an overabundance of others.
This has left chipmakers, who anticipated immense demand and opportunity, suddenly facing immense challenges. Many companies are now facing complex questions about whether and when to ramp up production, amid uncertainty about how long the current sales slowdown will last.
“Six months ago I would have said we were in this hypergrowth phase,” said Rene Haas, CEO of Arm, the British company whose chip technology powers billions of smartphones. Now, he says, “we’re on a break.”
For many consumers, products that were in short supply due to a potato chip shortage might start to become more available, but not immediately. Automakers, which have struggled to make enough cars with the lack of chips and other components, said they were getting more but still faced problems. Smartphone and computer prices could also drop as chip supply increases and prices fall for two types of memory chips they use.
But for now, not everyone is able to get all the chips they need, and prices remain high for many types of semiconductors. “We are still well above pre-pandemic prices,” said Frank Cavallaro, CEO of A2 Global Electronics and Solutions, a chip distributor.
Fears of a collapse, which have rocked semiconductor stocks this year, are evident in recent earnings announcements from chipmakers. South Korea’s SK Hynix reported a 20% drop in revenue on Wednesday and said its memory chip business “faces an unprecedented deterioration in market conditions.” Intel on Thursday provided further evidence of a slowdown in its third-quarter results, including a 20% drop in revenue and a $664 million charge to cover cost-cutting measures expected to include hardware cuts. jobs.
The Biden administration struck its own blow this month with a set of restrictions aimed at preventing China from using American chip-related technology. The measures restrict sales of certain advanced chips to Chinese customers and prevent U.S. companies from helping China develop certain types of chips.
This hurts semiconductor companies like Nvidia, which makes graphics chips used to run AI applications in China and elsewhere. The Silicon Valley company, which is already suffering from a sharp decline in video game app sales, recently estimated that US restrictions would likely cut its current quarter revenue by around $400 million.
The sanctions could hit even harder companies that sell chipmaking equipment, which in recent years have relied heavily on sales to Chinese factories.
Lam Research, which produces tools that etch silicon wafers to make chips, estimated China’s limitations would cut its 2023 revenue by $2 billion to $2.5 billion. “We’ve lost some very profitable customers in the China region, and that’s going to continue,” Doug Bettinger, Lam’s chief financial officer, said in a conference call last week.
Applied Materials, the biggest maker of chip-making tools, also said sales would suffer because of the restrictions. On Wednesday, another chipmaker, KLA, said its revenue next year is expected to decline by $600 million to $900 million as it cuts equipment sales and services to some customers in China. .
Concerns about foreign competition are nothing new in semiconductors, an industry notorious for its boom and bust cycles. But it has rarely faced a player as powerful as Taiwan Semiconductor Manufacturing Co., whose factories on the island produce chips designed by companies including Apple, Amazon, Nvidia and Qualcomm.
China claims Taiwan as its own territory, creating a potential risk for chip supply. This has helped spur recent bipartisan support for US chip legislation, which has been pushed hard by President Joe Biden.
He visited Ohio last month for the grand opening of a $20 billion Intel manufacturing campus. On Thursday, he visited a site near Syracuse, New York, where Micron has pledged to spend up to $100 billion over 20 years on a large complex to build memory chips, a project he called a “one of the most important investments in American history”. .”
These factories will be needed at some point, industry executives have said. But they are now grappling with the sudden and sharp drop in demand for chips.
The problem is particularly acute in processors and memory chips, which perform calculations and store data in personal computers, tablets, smartphones and other devices.
These products were hot items as consumers worked from home during the coronavirus pandemic. But that boom has now cooled, with PC sales falling 15% in the third quarter, according to International Data Corp estimates. The research firm also predicted that smartphone sales would drop 6.5% this year. Demand has been tempered by inflation as well as a long COVID lockdown in China, analysts said.
At the same time, token stocks have accumulated. Computer makers spooked by the shortage bought more components than they needed, said TechInsights researcher Dan Hutcheson. When customer demand dried up, they began to reduce orders.
“You see multiple issues converging,” said Syed Alam, who leads Accenture’s global high-tech consulting practice, including semiconductors.
Handel Jones, CEO of International Business Strategies, predicts total chip industry sales will grow another 9.5% this year. But he expects revenue to fall 3.4% to $584.5 billion next year. Last year, he predicted steady annual growth for the chip industry from 2022 to 2030.
The warning signs included Intel’s second-quarter results, which it announced in July. The company posted a rare loss and a 22% drop in revenue, blaming its own missteps and customers who cut chip inventory.
At Micron, the mood has also changed rapidly. In May, the company made upbeat presentations at an investor event in San Francisco about long-term demand for its memory chips. The following month, he warned of slowing demand and falling chip prices.
In September, the company reported a 20% decline in fourth quarter revenue. It also cut planned spending on plant and equipment by nearly 50% in the current fiscal year.