Uncertainty Remains in the Chip Industry

Even though US inflation eased slightly in July, especially on lower oil prices, the CPI index is still extremely high at 8.5% year over year. As inflation continues to plague numerous industries across the globe, the impact it’s having on the semiconductor industry continues to cause concern as experts fear it may be heading into a possible downturn.

This past Tuesday, the 9^th of August, Micron Technology Inc, the U.S Semiconductor manufacturer, dramatically reduced its current-quarter revenue forecast, citing a recent slowdown in the demand for personal computers and smartphones. Meanwhile, on the Monday prior, the U.S tech company Nvidia also advised of a decline in its gaming business, which has caused its second-quarter revenue to drop by a dramatic 19%.

In immediate light of the news, Nvidia’s shares dropped 8%, and on Tuesday, Micron’s shares fell 5.7%, pushing the Philadelphia SE Semiconductor index, composed of 30 members who are largely engaged in the creation of semiconductors as well as their distribution, manufacturing, and retail sales, down 4.3%. Since then, they’ve all bounced back to their pre-fall levels. Sony, Advanced Micro Devices, Qualcomm, and Intel have also all reported a softening in demand.

Daily charts of Nvidia and Micron – Source: ActivTrader platform

Micron has even warned of a negative free cash flow situation in the next few months as a result, a condition not seen since the beginning of 2020. The company now has plans to spend less on new manufacturing plants and equipment and is cutting the number of chips they create in response, to ensure the integrity and stability of their chip prices.

The company’s chief business officer, Sumit Sadana, told Reuters in late June that the shift from high to low demand had been “bigger than anyone was anticipating.” And that the changes would already be rippling through the ecosystem.

A highly cyclical business

In the last few months, the decline in orders has mostly been seen in chips that are used in technologies for smaller consumer products and gadgets, but more recently it’s been broadening to other markets too, including industrial, automotive, and data centers.

Some companies were understandably banking on a surge in demand post-covid, with the population supposedly heading back to work and experiencing better economic conditions, but inventories of chips and accessories continue to pile up in factories as sales stagnate.

After years of shortages across the globe, when wait times for certain chips were around six months at one point, and major companies like Apple lost out on countless millions of dollars worth of sales as a result, investors are now anxiously watching the industry as it experiences a sharp market correction, the likes of which have not been seen in around a decade.

During the height of the pandemic, smartphones, personal computers, and other technology were in unusually high demand, as the population moved to working and studying from their own homes. Naturally, companies worked hard to meet this new boom in demand, putting more and more capital into technology, manufacturing, and data centers to support the massive shift in consumer spending.

Now it seems that the tables have turned since the worst of the pandemic has apparently passed, and an oversupply of stock and other expenditures for many companies may cause consistent losses in the coming months while they make adjustments and/or divest.

As the cost of everyday living also skyrockets as a result of growing inflation, and interest rates continue to be increased worldwide, consumers are re-working their household budgets and weighing up the importance of spending their disposable income on leisure activities such as gaming and keeping up-to-date with new devices and technology if what they have is already working fine.

Innovation helps growth

One company that has apparently skirted the latest downward industry trends, according to their July earnings report, is the Taiwan Semiconductor Manufacturing Co. (TSMC). The company boasted its second record-breaking month with a 6.2% sales bump in July above the previous month, with US$6.23billion.

Analysts credit the revenue increase to the superior processes that have been developed to meet the demand for emerging technologies in computing and automotive electronics, such as the 5-nanometer and 7-nanometer processes currently in use, and the new 3-nanometer and 2-nanometer processes to be developed and produced in the near future.

U.S set to boost local production

Despite the current waning demand, the U.S will now provide $52.7 billion in subsidies to boost its local production, research, and technology in a bill signed by President Biden on Tuesday the 9^th of August. The bill aims to push the U.S to be more competitive with China and will affect industries including automotive, white goods, video games, and weapons systems, among others, while also creating thousands of jobs.

Companies out of Taiwan, such as the Taiwan Semiconductor Manufacturing Co. were responsible for around 60% of chip foundry revenue around the globe last year, and there are fears that the U.S is far too dependent on them for its key industries.

President Biden called it “a once-in-a-generation investment in America itself.” But skeptics argue that the grants for private businesses would be treated as blank checks. As expected, many of the major U.S Semiconductor company CEOs were present at the signing.