Analysts warn: Chip industry winter is approaching

During the epidemic, orders in the semiconductor market have increased significantly, sales and stock prices have repeatedly hit new highs, and global manufacturers are scrambling for orders and production capacity. While it is hoped that this boom will last for several years, it is clear that now chipmakers have begun to face a familiar and brutal problem: rising inventories and shrinking demand.

It's a recurring cyclical dilemma in the semiconductor industry, where it takes years to build a chip factory, and they don't always come online when they're needed most. The core problem of the past few years has been a lack of supply, and even now, some companies, such as automakers, are still facing a structural shortage of electronic components.

But for chipmakers, the winds have changed.

01.

Worst decline in a decade?

Citigroup analyst Christopher Danely even put forward a slightly exaggerated forecast: The decline in the industry will be the worst in at least 10 years, or even 20 years, and every company and every chip category may be affected.

The last similar recession occurred in 2019, and it usually doesn't last long, according to Bloomberg. But the impact is expected to be particularly pronounced due to a weakening global economy. If an inventory adjustment occurs while the economy slips into a recession, the semiconductor industry won't be able to rebound as quickly as it did after the last recession.

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▲ Changes in the total revenue of the semiconductor industry from 1998 to 2021 (Source: Bloomberg)

However, TSMC, the world's largest wafer foundry, made a different forecast during its latest earnings meeting, believing that a typical cycle of chip demand decline will occur in 2023, but the overall decline will not be worse than in 2008.

Whether it is TSMC or SMIC, the largest wafer foundry in mainland China, it is judged that this round of cyclical adjustment is expected to continue until the first half of 2023, and it will take several quarters for excess inventory in the semiconductor supply chain to rebalance to a more reasonable level. , but also convey confidence in future demand growth.

Liu Deyin, chairman of TSMC, revealed during the earnings conference that although the demand for chips for consumer electronics products has weakened, TSMC's production capacity will remain fully loaded this year under the strong demand for automotive chips and high-performance computing chips.

SMIC predicts that the demand growth in the integrated circuit industry and the global regionalization trend will remain unchanged. Although there will be short-term adjustments, the long-term logic of local manufacturing will remain unchanged. SMIC is still confident in its own medium- and long-term growth.

However, unlike the stable and strong performance of these chip manufacturers, the industry signals released by many chip design companies are not optimistic. U.S. GPU giant Nvidia’s gaming business revenue fell by more than 30%, and U.S. memory chip giant Micron Technology warned that demand in many areas is rapidly disappearing.

The same day Micron told investors chip demand was waning, U.S. President Joe Biden signed the American Chip and Science Act. That's "a bit of dark humor," according to Stacy Rasgon, an analyst at research firm Sanford C. Bernstein.

"Politicians will find out how quickly shortages can resolve themselves when the industry turns," Rasgon said. Ultimately, no one really knows what's going to happen. This is the chip industry, and everyone is not good at forecasting demand, being too optimistic and then too pessimistic.

02.

Chip shipments plummeted, Qualcomm cut orders and cut prices

The haze hanging over the heads of chip manufacturers comes from the sharp decline in demand in the downstream market. Bloomberg compared the changes in the personal computer (PC) industry, one of the biggest buyers of chips, to "a harbinger of dark times."

In the second quarter of this year, desktop computer processor shipments fell to their lowest level in nearly 30 years, and total processor shipments experienced their biggest year-over-year decline since 1984, according to market research firm Mercury Research. According to market research firm CINNO Research, China’s smartphone SoC terminal shipments in the first half of 2022 were about 134 million, down about 16.9% year-on-year.

It's a painful aftereffect of the coronavirus lockdown, a trend that spurred demand for PCs and other equipment as many people switched to working from home, at a time when chip makers were almost relentless in taking orders and tackling thorny supply chain issues. Chip buyers are also very proud and willing to pay higher prices to purchase chips.

But now, consumers' buying demand has weakened, and correspondingly, chip buyers have also begun to cut orders, which has caused what the industry calls an "inventory correction."

According to CCTV Finance and Economics, the US mobile chip giant Qualcomm is going through the action of cutting orders, has reduced its flagship mobile chip Snapdragon 8 series orders by about 15%, and will cut the price of its two flagship mobile chips by about 40% by the end of the year. South Korean memory chip giant Samsung is also working to clear inventory to reduce the impact of weaker demand for consumer electronics on memory chip shipments.

The latest financial report of TSMC, the world's largest wafer foundry, also reflects the downturn in the consumer electronics market. The smartphone business is no longer TSMC's No. 1 revenue generator in the latest quarter, and its future share is expected to continue to decline.

According to data from the National Bureau of Statistics of my country, the monthly output of domestic integrated circuits has declined month by month since reaching a peak in August 2021. In July 2022, domestic integrated circuit output plummeted by 16.6%. In the same month, downstream smartphone output and microcomputer equipment output declined respectively. 9.1% and 6.0%.

The South Korean market also showed signs of slowing technology demand: South Korea's July smartphone sales fell 29.2% year-on-year, while exports of computers and auxiliary equipment fell 21.9%, and memory chip shipments led the decline with a 13.5% decline.

03.

From competition between companies to competition between countries

"It's going to be a serious recession," said Northland Securities analyst Gus Richard. "It used to be a competition between companies, but now it's a competition between countries because of strategic importance."

A different factor this time is that governments at the heart of the global semiconductor industry are heavily subsidizing new factories and equipment. Companies such as Intel have lobbied for chip legislation, saying the U.S. needs to be more competitive with Asian manufacturers. Now, they are ready to start adding new capacity at a time of erratic demand.

According to the "Mid-Year Total Semiconductor Equipment Forecast Report" released by the international semiconductor industry association SEMI, the total global semiconductor manufacturing equipment sales of original equipment manufacturers will reach a record $117.5 billion this year, a year-on-year increase of 14.7%. The value will increase to $120.8 billion. In 2022, Taiwan, China and South Korea are expected to remain the top three buyers of equipment.

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▲ Forecast of the market size of semiconductor equipment in mid-2022 (Source: SEMI)

The chip manufacturing industry has become increasingly unstable due to high upfront costs. The $20 billion chip factory needs to run 24 hours a day and must pay off quickly within a few years before it becomes obsolete. With the increasing capital investment and technical threshold, there are very few companies with cutting-edge technology. Three companies, TSMC, Samsung Electronics and Intel, account for most of the production capacity for advanced chip manufacturing.

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▲ TSMC's revenue growth (Source: Bloomberg)

These companies added production lines in time and made the supply chain as efficient as possible. But plans to build local chip production lines in the U.S. and Europe could upset the balance the chip industry has made in this quest for efficiency.

Some industry insiders or analysts are not optimistic that the United States will support local chip manufacturing. For example, Fitch Ratings analyst Jason Pompeii believes that the industry has "effectively built up duplicate supply chains in the U.S. and Europe," with a short-term risk of overinvesting in capacity leading to an economic downturn.

However, chipmakers are generally optimistic about long-term demand, and the total global semiconductor industry revenue is expected to exceed $1 trillion by the end of 2030. Based on this calculation, the large-scale construction of chip factories is likely to be a worthwhile investment.

04.

Conclusion: The chip industry has entered a period of cyclical downturn

On the whole, the previous wave of chip hoarding caused by the imbalance between supply and demand is returning to rationality. As the epidemic eases and new production lines of chip manufacturers are put into use one after another, the problem of lack of cores has gradually been alleviated, but the trend of market weakness is difficult to reverse, and the chip industry is entering a downward cycle.

In the long run, people are optimistic about the prospects of the chip semiconductor market, and emerging markets such as cloud computing and smart cars will generate stronger chip demand. However, the uncertainty is that the global chip manufacturing industry is now involved in an unprecedented geopolitical storm, and its impact on the future direction of the semiconductor industry is still unknown. The chip-related incentive policies of various countries and the process of supporting local chip suppliers will continue to be Focus.