From supply shock to demand shock: New crisis hits semiconductor industry

As the companies were working on improving the supply of semiconductors, the demand for PCs, and mobile phones, among other things, fell, now leaving these companies with excess inventory

Just as things were starting to improve, a new crisis hit the semiconductor industry. The industry is suddenly facing a downturn due to a fall in demand and excess inventory, according to a report by Financial Times (FT).

The report stated that major chipmakers in the US, including Intel and Nvidia, now have more inventory than needed. This has pulled the prices lower. The fall in demand was more pronounced in the PC, mobile and gaming industries.

For the last two years, the world was facing a shortage in the supply of semiconductors. The demand for PCs and mobile phones had spiked due to work-from-home norms, the suppliers were unable to meet the sudden boom in the demand.

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As a result, several companies, especially in the automobile sector, had to cut down their production and raise prices. But as soon as the situation started to look better, automakers turned optimistic.

"The vehicle production would increase as the situation regarding the availability of semiconductors has improved. The company has also made further improvisations to enhance production. I am exhorting our team to reach 2 million units...", RC Bhargava, chairman of Maruti Suzuki said last week.

Now, the crisis has quickly shifted from supply shortage to demand shortage, leaving companies with excess inventories. 

In July, the US passed its long-awaited Chips Act, announcing $52 billion in support to the domestic chipmakers by the government. However, chipmakers slashed billions of dollars off their planned capital expenditure.

Intel reported a loss of revenue worth $2.6 billion, in July. It reduced its planned capital spending budget by $4 billion to adjust to the falling demand.

Nvidia, the biggest manufacturer of graphics processing units, announced a 44 per cent fall in demand for gaming chips in the last quarter.

Micron, a leading manufacturer of memory chips, announced that it is expecting the cash flow to turn negative in the next three quarters.

On the one hand, the chip's inventory in the US has jumped from enough to support around 1.2 months of production to 1.7 months in July. On the other hand, the demand for electronic devices, among others, has been falling owing to the economic slowdown leaving the companies with excess inventory.

The US is not alone in facing the brunt of the crisis. China's Semiconductor Manufacturing International Corporation said, according to FT, that the demand for smartphones and other consumer electronics has slowed down. Several manufacturers have cancelled the orders for chips altogether.

Taiwan Semiconductor Manufacturing Company, the largest foundry in the world, said that it is expecting an inventory correction, and it would last till the end of 2023.

Apart from PC and smartphone markets, the demand for microchips has fallen in the gaming sector and data centres. Auto companies have also cut their orders for the semiconductor chips, Micron chief Mark Murphy told FT.