US chipmakers go from brutal boom to bust

If Wall Street had any doubts about the speed at which the chip industry boom unraveled, surprisingly gloomy financial forecasts from companies like mobile chipmaker Qualcomm should have calmed them.

“It’s kind of an unprecedented change in a short period of time,” Akash Palkhiwala, the company’s chief financial officer, told analysts this month. “We have gone from a period of a shortage of supply to a drop in demand.”

Qualcomm cut its revenue forecast for the current quarter by 25% as lower consumer spending hit smartphone sales. The forecast came as some of the major chipmakers issued surprisingly weak sales and profit forecasts and announced a series of job cuts to come.

Among those who cut back on their forecasts, AMD warned that PC processor sales this quarter would be down 40% from a year ago, with profit margins also surprisingly low. Intel, which slashed its revenue forecast again after a steep cut in the previous quarter, announced thousands of layoffs ahead with a plan to cut costs by up to $10 billion by 2025.

A year ago, with stock prices hitting highs, it was easy to believe the chip industry had entered a new era. Giant new markets were opening up “from mobile to cloud to electric vehicles to the metaverse,” said Sanjay Mehrotra, CEO of memory chipmaker Micron, at the time. Supply chain issues had caused widespread shortages of chips, driving up prices.

Asked in an interview with the FT whether the chip industry was still vulnerable to the kind of vicious circles that have plagued it in the past, Mehrotra said: “Our industry is different, and certainly Micron is very different.” But less than a year later, the flea cycle has returned with a vengeance.

In September, Micron warned that its revenue this quarter would fall to $4.25 billion, down 45% from a year ago. The company also said its gross profit margin would plummet from 46% to 25%. In response, it nearly halved its planned capital spending next year.

By early October, the Philadelphia Semiconductor Index had fallen 47% from its peak, compared with a 26% drop in the broader market. But since then, as chip companies confirmed investor concerns about the depth of the slowdown, the index has rebounded 16% on hopes that a sharp cycle bottom may be in sight.

For Wall Street, the severity of the sudden cyclical downturn even overshadowed action by the United States last month to block sales of advanced chips and chipmaking equipment to China. The move, which is likely to dampen the industry’s long-term sales growth, was barely mentioned in the latest round of earnings calls.

The intensity of the recent slowdown owes much to a glut of inventory that has been building up at a surprising speed. The explosion in demand for many digital products and services during the pandemic has fueled optimism among chip executives like Micron’s Mehrotra, leading to predictions of a strong secular growth period ahead.

At the same time, chip shortages have led to a deliberate buildup of inventory levels to hedge against future supply shocks.

This left the industry vulnerable to the sudden turn that occurred this summer. Sensing that consumer demand was weakening, starting with PCs and smartphones, many hardware makers took steps to reduce their bloated inventory, halting new orders and sending chipmakers into a tailspin.

Other factors contributed to the oversupply, including an increase in global chipmaking capacity. According to Dan Hutcheson, president of chip research company VLSI, global capacity of wafers – the silicon disks on which chips are etched – has grown from 1.06 billion square inches early last year to 1.22 billion in September, well ahead of normal industry expansion rates.

Overcapacity could well become a permanent feature of the market, said Pat Moorhead, analyst at Moor Insights & Strategy.

Attempts by the US and EU to reduce their reliance on global supply lines are leading to a “balkanized” chip world, Moorhead said. With every major country or region looking to build up enough excess capacity to protect against unexpected shocks, overcapacity could become structural, he added.

But the end of the first stage of the deep recession could at least be in sight.

Qualcomm predicted last week that it would take two quarters for smartphone makers to burn through excess inventory, with its sales low coming in the current quarter. AMD also noted a possible wipe out of the surplus by next spring, indicating a period of greater stability.

Some analysts also said the startling harshness of some of the latest forecasts, which were well below Wall Street expectations, suggested a market bottom could be near.

“We are coming to the point of capitulation,” Hutcheson said, referring to an apparent willingness by chip companies to throw in the towel and write off some of their own excess inventory.

The end of the sharp correction, however, would still leave the industry vulnerable to any broader weakening in the global economy, with an expected recovery in chip demand in the second half of next year in play.

Global chip sales could fall 6-20% for the full year, according to a forecast from VLSI – although, as the surprising severity of this year’s crisis has shown, even forecasts with ranges this wide can miss the mark.

Demand is still hot in some chip markets, according to executives at companies that recently reported earnings. Automakers top the list as supply shortages continue and demand increases for electric vehicles and increasingly sophisticated driver assistance systems.

The latest surge in capital spending by the biggest tech companies has also ensured strong sales of chips for large-scale data centers. Shortages of analog chips – which are used in things like power supplies and sensors – have also continued.

Yet some of the largest semiconductor markets are entering a profoundly different period. After exploding during the pandemic as millions of people were forced to work and study from home, PC sales fell rapidly, with many forecasts pointing to a 20% drop in sales this year to around 275 million.

Deep disagreement over the outlook for next year has highlighted the potential for further disappointment. Intel said it believes PC demand has risen permanently as a result of the pandemic, and last month released a surprisingly robust forecast for sales of 270 million to 295 million.

Rival AMD, on the other hand, predicted another 10% drop, suggesting sales could fall to around 250-255 million and bring the PC industry back to pre-pandemic levels.

The latest round of quarterly earnings reports also revealed that the weakness first seen in consumer demand for PCs and smartphones had spread, with gaming, business and industrials markets all having a hard time. signaled a slowdown in order growth.

At the same time, Texas Instruments, which sells in a wider range of markets than most chip companies, predicted that it would see weaker demand from all of its end markets before the end of the year, at except car manufacturers.