Chip industry faces bad downturn with recession fears, demand lag

The chip industry faces an inventory correction that could be the worst decline in more than a decade, leading to a bust in sales, according to analysts. 

“It’s going to be bad downturn,” said Gus Richard, an analyst at Northland Securities, in comments to Bloomberg.

Chris Danely, an analyst at Citigroup has repeatedly been forecasting the drop to be the worst in a decade or two, possibly reaching back to 2001.  Every chip company and every chip category is likely to suffer, Danely believes.

Their fears are based on widespread concerns about chip inventory buildups during the pandemic that are now confronting worries from chipmakers and their OEM buyers about growing signs of a global recession and lessening demand for electronics, including desktop computers but also data center servers and more.

The last big inventory correction in the global chip industry occurred in 2019. Months afterward, sales of chips soared and chip stock prices climbed through 2021 and into 2022 as demand for all types of computers soared during the pandemic, even as some chip supplies were not available. In fact, some automakers still are not able to get all the chips they need in the last half of 2022.

Ironically, pronounced worries about an inventory correction come on the heels of passage of the U.S. Chips and Science Act which includes $52 billion in grants and additional tax incentives to build domestic fabs.

The very day President Biden signed the bill, Aug. 9, Micron told investors demand was fading, which triggered a decline of 4.6% on the Philadelphia semiconductor index with all 30 members in the red, its biggest drop in two months. Micron’s warning came after disappointing quarterly earnings results from Nvidia, Intel and AMD.(The index dropped 3.6% early Wednesday to $2,934.69)

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“Compared to our last earnings call, we see further weakening in demand because of adjustments broadening outside of just consumers to other parts of the market including data centers, industrial and automotive,” Micron CEO Sanjay Mehrotra said in an interview with Bloomberg Television.  In a regulatory filing, Micron said there will be “significant sequential declines in revenue and margins” as customers reduce their stockpiles of unused chips.

The impact of Chips Act funding is not expected to be felt for years because large $10 billion fabs take several years to build.  Intel is expected to break ground on two large fabs valued at $20 billion in central Ohio this fall but reaching full productivity of chips could take five years. However, with 24 chip fabs now under construction globally, according to SEMI, there is the risk of “overinvesting in production capacity heading into an economic downturn,” according to Fitch Ratings analyst Jason Pompeii, also quoted by Bloomberg.

To summarize, as of the last half of 2022, chipmakers face growing inventory and shrinking demand.

IDC is projecting widespread electronics products will see dropping shipments into the first half of 2023, which indicates the reduced demand. “There is a good chance the PC market will be down double digits this year and growing likelihood it could also decline next year, yet by a smaller decline,” said IDC program vice president Ryan Reith in a recent email to Fierce Electronics.

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In June, IDC said global semiconductor revenue is expected to reach $661 billion for all of 2022, up nearly 14% from 2021’s tally of $582 billion.    IDC also projected a five-year growth rate of 4.93% from 2021 to 2026.  “Semiconductor content growth…remains unabated over the next five to seven years,” said Mario Morales, group vice president for semiconductors at IDC, in a press release from June.

Given the complexities of judging macroeconomic trends in the chip industry, some chipmakers urged calm. “There is no need to panic in [the] semiconductor industry!” wrote Naveed Sherwani, CEO of RapidSilicon in a LinkedIn post from August 11. 

“We must understand the cyclic nature of [the] semiconductor business,” he added. “As a result, when shortages happen, we should not panic and a downturn should not be seen as catastrophic. Semiconductor execs have seen this game for a long time. These cycles have been part of semiconductors [for the] last 30+ years.”

Kris Iniewski, director of detector architecture and applications at Redlen Technologies added on Linked In, “The boom-and-bust cycle is inherent in any capitalist system and just more pronounced in semis.”

Jack Gold, an industry analyst at J. Gold Associates, said it is difficult to view the entire chip industry across all segments of logic and memory. Demand has slowed for PCs, data center and cloud, but "there will certainly be pickups in ARM based chips that the hyperscalers are building," he said. 

"Semiconductors is a cyclical market and has been so for a very long time," Gold added. "There is every reason to expect it to remain so. They are subject to the same macroeconomics as everyone else that uses chips, so if we go into a slowdown or recession, so will they."