We're Headed for a Chip Glut
Signs point to an inventory correction, without the strong economy to get us out of it quickly.
Since 2020 we've been hearing about the chip shortage, especially in relation to cars. But in the last couple of months we've seen signs that the shortage may be easing, and that consumer chips like GPUs are becoming readily available again and prices are returning to MSRP if not lower. Supply chain rumors hint that AMD and Nvidia may reduce prices even more, in order to clear out inventory. That's good news for consumers right now, but signals a looming problem for chipmakers.
Bloomberg's Ian King has a story up called "Chipmakers’ Pandemic Boom Turns to Bust as Recession Looms."
King lays out the case with the following stats.
-Nvidia reported more than 40% decline in its core business
-Micron warned of falling in demand.
-This week Chinese government data reported a 17% decline in integrated circuit output in July.
-Mercury Research reported in Q2 that desktop processor shipments fell to their lowest level since 1984 or so.
All of that supports analysts who say the chip industry is experiencing an "inventory correction." This in itself isn't new. Chip supply logistics is not an exact science and occasionally production runs ahead of demand. The last time that happened was in 2019. Usually prices fall to clear out the inventory, consumers take advantage of the low prices and things return to an equilibrium.
So in the aftermath of the surge in demand during lockdowns combined with an unusual amount of supply chain complications it's not shock that we would see a swing back toward inventory. In fact, companies have been waiting for this to help alleviate the chip shortage. The problem this time is that, unlike in 2019, we have a lot of economic uncertainty. Consumers spending less in general, so may not take advantage of those cheaper prices as fast or in as great a number as they would normally.
In another signal that we may be headed for a chip glut, Reuters notes that tech companies have reported slower annual cloud revenue growth this past quarter. Google Cloud slowed by 8%, Microsoft Azure by 6% and AWS more than 3%. Slower cloud growth could mean slower build-outs of data centers, and data center buildouts are one of the biggest drivers of chip sales. IN addition to that possibility, all three companies indicated they plan to hold on to equipment longer, sometimes up to 6 years, in order to save money. One counter-trend is the rise in autonomous cars and hopes for a booming metaverse sector.
And yet, capacity to build chips is just getting bigger. All of this is happening as the US, China, Japan and Europe all are issuing subsidies to build chip capacity. Chip industry group SEMI reports 24 new large-scale plants are being built this year. That's above the average of 20 since 2014. SEMI says spending on chip-making equipment will rise 15% this year to $117.5 billion and hit $120.8 billion in 2023. Samsung, TSMC and Intel account for the majority of production. As Fitch Ratings analyst Jason Pompeii put it when speaking to Bloomberg, the chip industry may be “overinvesting in production capacity heading into an economic downturn.”