Chipmakers see ‘spectacular’ drop in demand

More and more signs are emerging that the tech industry downturn may be deeper and more lasting than feared.

After years of record investments, manufacturers of chips have warned weekly that demand is fragile. In the latest sign of trouble, the Samsung Electronics and the Advanced Micro Devices reported disappointing results, with a few hours difference, which were far below projections.

Samsung – the world’s biggest memory chip maker – reported a 32% drop in operating profit, while PC processor AMD said its result is expected to be $1 billion below its previously reported forecast. Analysts’ reaction was one of surprise.

The numbers came on the heels of pessimistic comments from memory makers Micron Technologies and Kioxia Holdings, which have been cutting spending and production in a bid to stabilize falling prices. Stocks of companies in the sector felt the impact, including AMD, Nvidia and Intel. Roles from chip equipment vendors such as ASML and PC makers such as Lenovo also declined. Japan’s Disco Corp., whose equipment shreds, polishes and cuts chips, fell to its lowest in more than two years on Friday.

“It looks like final demand has likely deteriorated a lot in recent weeks, and end customers may be burning through inventory at a rapid pace,” said Stacy Rasgon of Bernstein. AMD’s customer revenue cut “actually takes my breath away.”

The exception was Taiwan Semiconductor Manufacturing Co., which reported an increase of approximately 48% in quarterly revenue to about 613 billion Taiwan dollars (US$19.4 billion) – at the top of the range of its dollar forecast – helped for its growing weight as the world’s largest maker of the most advanced chips. The downward trend in demand may not have been fully reflected in the numbers, especially given the sharp devaluation of the Taiwan dollar, said Jeff Pu, an analyst at Haitong International Securities.

Consumer electronics companies, which faced shortages during the pandemic, are now dealing with a sudden drop in demand, even as shipping and raw material costs remain high. Recession fears make cost-cutting the new norm across the tech industry, and companies that have been hoarding chips for two years are now choosing to cancel or delay orders and tap into inventories just as new capacity comes in.

The semiconductor industry is also challenged by US government export restrictions, which are reinforcing pressure on allies to stop shipping high-end chips to a growing list of Chinese companies as it seeks to rein in the Asian country. That has hurt chipmakers like AMD and Nvidia’s business in the world’s biggest semiconductor market.

Supply and demand are not all that are behind the current bear cycle, said Heo Pil-Seok, CEO of Midas International Asset Management in Seoul. “US government export controls would further limit the sales of IT companies in China, and a large part of the demand for chips will lose steam. If AMD and Nvidia can’t sell their chips in China, memory makers’ profits will deteriorate further.”

The PC segment, which for years has lost ground to smartphones, looks particularly vulnerable. But a severe recession would affect demand even in areas that have remained solid, such as cloud computing, automotive and factory automation.

“We would continue to avoid PC-centric names, which in our coverage list include AMD, Intel and Nvidia, due to a likely prolonged slump for PCs next year and continued weakness in consumer gaming,” wrote Baird analysts Tristan Gerra and Tyler Bomba, in customers note.

Source: Exam