US chipmakers reel from sharp boom to bust

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If Wall Street had any doubts about the speed at which the chip industry’s growth has changed, unexpected financial forecasts from companies like smartphone maker Qualcomm should have put them to rest.

“It’s a change that hasn’t happened in a while,” Akash Palkhiwala, the company’s chief executive, told analysts this month. “We went from a period of scarcity to scarcity.”

Qualcomm has cut 25 percent from its earnings guidance over the past year due to consumer spending that has hit smartphone sales. The forecast came as some of the leading chip makers surprisingly released weak sales and profit estimates and hinted at future job cuts.

Among those who have taken an ax to their forecasts, AMD warned that sales of PC processors this quarter are down 40 percent from last year, while profits are also surprisingly weak. Intel, which also cut its revenue forecast after a sharp reduction in the previous quarter, indicated that thousands of people will be put on hold with plans to cut costs of up to $10bn by 2025.

A year ago, when share prices soared, it was easy to believe that the chip industry had entered a new era. Huge new markets were opening up “from mobile to the cloud to electric cars to the metaverse,” Sanjay Mehrotra, chief executive of memory chipmaker Micron, said at the time. Supply chain problems led to chip shortages, driving up prices.

Asked in an interview with the FT whether the chip business is still vulnerable to the challenges of the past, Mehrotra said: “Our companies are different, and of course Micron is very different.” But less than a year later, the chip cycle is back with a vengeance.

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In September, Micron warned that its revenue for the quarter would fall to $4.25bn, down 45 per cent from a year earlier. The company also said its gross profit margin would drop from 46 percent to 25 percent. In response, it cut nearly half of its budget for next year.

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By early October, the Philadelphia semiconductor index was down 47 percent from its peak, compared to a 26 percent fall in the broader market. But since then, the chip industry has confirmed investors’ concerns about the depth of the fall, and the index has also increased by 16 percent in anticipation of a further decline.

For Wall Street, the threat of a sudden collapse has also fueled the U.S. move last month to ban the sale of many chips and equipment to China. The move, which is expected to hamper long-term sales growth, was not mentioned in the latest calls.

Much of the recent decline is due to the fact that the supply chain has risen at an alarming rate. The high demand for many digital products and services during the pandemic brought optimism to chip executives like Micron’s Mehrotra, which led to predictions of a long-term global growth.

Likewise, the lack of chips led to an increase in inventory to protect against future threats.

This left companies vulnerable to the sudden changes that occurred this summer. Sensing that consumer demand is slowing, starting with PCs and smartphones, many hardware makers have taken steps to reduce their inventory, freeze new orders and send chipmakers into a tailspin.

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Other factors have contributed to the increase, including a sharp jump in global arms production. According to Dan Hutcheson, chairman of chip research firm VLSI, global wafer capacity – the silicon discs on which chips are embedded – rose from 1.06bn wafers at the start of last year to 1.22bn this September, ahead of industry growth.

The oversupply may be a steady part of the market, said Pat Moorhead, an analyst at Moor Insights & Strategy.

Attempts by the US and the EU to reduce their dependence on international lines will result in a “balkanised” country, Moorhead said. With any major country or region seeking to produce enough to protect itself from unforeseen risks, the surplus could be systemic, he added.

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But the end of the first phase of the recession may be in sight.

Qualcomm last week predicted that it would take the smartphone maker two quarters to burn off its sales, with the decline in its sales coming in the current quarter. AMD also noted that it could end the surge by next Spring, pointing to a more stable timeline.

Some analysts said that the surprising risk of the latest forecasts, which were lower than Wall Street’s expectations, indicated that the market may be about to close.

“We’re reaching a tipping point,” Hutcheson said, referring to chip companies’ willingness to throw in the towel and write some of their own add-ons.

The end of strict controls, however, would leave companies vulnerable to any weakening of the global economy, with the prospect that chip demand in the second half of next year is at risk.

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Global chip sales could fall anywhere from 6-20 percent throughout the year, according to VLSI’s forecast – despite the staggering severity of the fall this year has shown, even predictions with such huge ranges can miss the mark.

Demand remains hot in some chip markets, according to company executives who reported recent earnings. The automotive industry is at the top of the list, as supply shortages continue and demand for electric vehicles and driver assistance systems rises.

Recent increases in investment by major technology companies have also ensured strong sales of chips in big data centers. The shortage of analog chips – used in things like electronics and sensors – has continued.

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However, some of the largest semiconductor markets are entering a very different era. After the pandemic forced millions of people to work and study at home, PC sales fell sharply, with many forecasts pointing to a 20 percent drop in sales this year, to around 275mn.

Widespread disagreement over next year’s outlook has signaled the possibility of another upset. Intel said it believed that demand for PCs had increased significantly due to the pandemic, and last month gave a surprisingly strong forecast of sales of 270-295mn.

Rival AMD, in contrast, predicted another 10 percent drop – meaning that sales could fall by around 250-255mn and bring the PC industry back to pre-pandemic levels.

The latest quarterly earnings reports also showed that the weakness seen in consumer demand for PCs and mobile phones has spread, and the gaming, business and industrial markets are all said to be softening their growth.

At the same time, Texas Instruments, which is sold in more markets than most chip companies, predicted that demand in all its markets before the end of the year, except for car manufacturers.


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