Excess Chip Supply And Waning Demand Plague Global Semiconductor Industry: Report

Post pandemic, the decrease in demand for laptops, smartphones, game consoles, etc., has led to an abundance of chip supply in the market, forcing the manufacturers to announce production cuts

The semiconductor industry was plagued by supply woes during the pandemic leading to a worldwide shortage of semiconductors. Interestingly, not only has the industry recovered from the shortage, but has rather ventured to the other end of the spectrum in certain sectors. 

According to a report by CNBC, the pandemic-induced chip shortage has not only balanced itself to an extent but has entered the excess problem now. Semiconductors are tiny components that are integral to many products including cars, game consoles, smartphones, LED bulbs, and more. At present, two types of chips are in oversupply - NAND and DRAM memory. The report further explains that these chips go into devices like laptops and also servers in data centers. While certain chips are available in excess, demand for chips in the auto sector still remains strong. 

During the pandemic, companies saw a huge demand for laptops, smartphones, and game consoles from consumers, which led to a shortage of these memory chips made by companies like Samsung, SK Hynix, and Micron. 

In order to keep up with the demand, the manufacturers not only increased supply but also started stockpiling them to increase their inventory. Once the pandemic got over and consumers got out of lockdown, the economy fell and demand for these products went really down.  

In turn, “The makers of these end products stopped ordering chips and instead focused on selling through the inventory they already had,” said Peter Hanbury, a partner in the telecoms, media, and technology practice at Bain & Company, as reported by CNBC.

Hanbury added, “This led to a strong ‘bullwhip’ effect for the semiconductor markers further back in the supply chain where sky-high demand during the chip shortage suddenly dried up as end markets stopped ordering chips and instead focused on selling through the inventory they already had.”

Companies like Samsung, SK Hynix gained from the chip shortage during Covid but the recent glut has hit their profits hard. CNBC reported that Samsung posted a 95 per cent fall in operating profit in its second-quarter earnings, while SK Hynix reported a loss in its second quarter versus a profit earlier, both on a year-on-year (YoY) basis. Even Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chipmaker, reported its first quarterly profit decline in four years in its latest quarterly earnings, the report said.

The outlook for the global PC and smartphone market appears to be bleak, which is expected to impact these companies further. Sze Ho Ng, an analyst at China Renaissance Securities, said, “The smartphone market is still the biggest part of TSMC’s revenue. That part is still not seeing any meaningful pickup.”

In order to reduce the supply in the market, prominent memory chip firms have announced production cuts, the report stated. While Samsung has said it expects a recovery in global demand in the coming months, TSMC last week said it expects “continued inventory adjustment” from customers. Ng further added, “After this year’s correction, I think there will be a second-half growth scenario for TSCM, but how strong that will be will be dependent on the macro environment.”