US chipmakers teeter from boom to recession

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If Wall Street had any doubts about how quickly the chip-making boom turned into a crash, the unexpectedly bleak financial outlook from companies like mobile chip maker Qualcomm should have put it to rest.

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

Qualcomm cut 25 percent of its revenue guidance for the current quarter as weak consumer spending affected smartphone sales. The forecast came as some of the leading chip makers released surprisingly weak sales and earnings forecasts, and pointed to a round of job cuts ahead.

Among those who took an ax for their forecasts, AMD warned that sales of processors for personal computers this quarter will be down 40 percent from last year, with profit margins surprisingly weak. Intel, which again lowered its revenue forecast after a big drop in the previous quarter, indicated thousands of profession Future layoffs with a plan to cut up to $10 billion in their costs by 2025.

A year ago, when stock prices were at their peak, it was easy to believe that the chip industry had entered a new era. Sanjay Mehrotra, CEO of memory chip maker Micron, said at the time that giant new markets were opening up “from mobile phones to cloud cars to electric cars to the metaverse.” Supply chain problems caused widespread shortages of chips, and prices rebounded.

When asked in an interview with the Financial Times whether the chip business is still subject to the kind of vicious cycle that has hit it in the past, Mehrotra declared: “Our industry is different, and certainly Micron is very different.” But less than a year later, the foil cycle is back in force.

In September, Micron warned that its revenue this quarter would drop to $4.25 billion, down 45 percent from a year ago. The company also said its gross profit margin would collapse from 46 percent to 25 percent. In response, it cut nearly half of planned capital spending next year.

By early October, the Philadelphia Semiconductor Index was down 47 percent from its peak, compared to a 26 percent drop in the broader market. But since then, after chip companies underscored investor concerns about the depth of the downturn, the index has rebounded 16 percent in hopes of looming the bottom to the sharp cycle.

For Wall Street, the severity of the sudden cyclical downturn has overshadowed the action taken by the United States last month sales block From advanced chips and chip manufacturing equipment to China. The move, which is likely to affect the industry’s sales growth in the long run, was barely mentioned in the latest round of earnings calls.

The The severity of the last contraction This is thanks to a glut of inventory that has built up incredibly quickly. Booming demand for many digital products and services during the pandemic has fueled optimism among chip executives like Micron Mehrotra, leading to predictions of a strong period of secular growth ahead.

At the same time, chip shortages have led to a deliberate build-up in inventory levels to protect against future supply shocks.

That left the industry vulnerable to the sudden turnaround that occurred this summer. Sensing that consumer demand was weakening, starting with computers and smartphones, many device makers took steps to reduce their bloated inventories, halt new orders and drive chip makers to a meltdown.

Other factors have contributed to the oversupply, including a jump in global chip manufacturing capacity. According to Dan Hutcheson, president of chip research firm VLSI, global chip capacity — the silicon discs on which chips are etched — has risen from 1.06 billion square inches early last year to 1.22 billion square inches in September this year, well ahead of normal industrial expansion rates. .

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

Moorhead said that attempts by the United States and the European Union to reduce their dependence on global supply lines are leading to a “Balkany” world of chips. He added that as each major country or region seeks to build enough surplus capacity to protect itself from unexpected shocks, excess capacity can become structural.

But the end of the first phase of a severe contraction may at least be in sight.

Qualcomm last week predicted that it would take two quarters for smartphone makers to burn off their surplus inventory, with its sales hitting a low point in the current quarter. AMD also indicated that the surplus could be liquidated by next spring, indicating a period of greater stability.

Some analysts also said that the sudden intensity of some of the recent forecasts, which was well below Wall Street expectations, suggests that a bottom in the market may be near.

“We have reached the point of giving up,” Hutchison said, noting the apparent willingness of chip companies to throw in the towel and write off some of their excess inventory.

However, ending the sharp correction will leave the industry vulnerable to any broader weakness in the global economy, with the hoped-for recovery of chip demand in the second half of next year at stake.

Global chip sales could fall anywhere from 6 to 20 percent for the year as a whole, according to VLSI forecasts — despite the sudden severity of this year’s slump, even predictions of such broadbands can miss.

Demand is still feverish in some chip markets, according to executives at companies that reported earnings recently. Car companies are topping the list, with continued supply shortages and increased demand for electric vehicles and increasingly sophisticated driver assistance systems.

The recent surge in capital spending by the largest technology companies has also ensured robust sales of chips for large-scale data centers. Analog chips – which are used in things like power supplies and sensors – also continued to be in short supply.

However, some of the largest semiconductor markets are entering an entirely different period. After booming during the pandemic as millions of people were forced to work and study from home, PC sales have fallen rapidly, with many forecasts pointing to a 20 percent drop in sales this year, to about 275 million.

The sharp disagreement over the outlook for next year has highlighted the potential for more disappointment. Intel said it believes demand for computers has permanently risen as a result of the pandemic, and last month issued a surprisingly strong forecast for sales of between 270 and 295 million.

By contrast, AMD forecast another 10 percent drop — suggesting sales could drop 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 weakness first seen in consumer demand for PCs and smartphones has spread, with gaming, corporate and industrial markets reported to have seen lower demand growth.

Meanwhile, Texas Instruments, which sells in a wider range of markets than most chip companies, expects to see weaker demand from all of its end markets before the end of the year, with the exception of automakers.

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