Chip industry slowdown will last longer than expected, manufacturers warn

Semiconductor companies have signalled that the industry’s sharpest slowdown in more than a decade is lasting longer than expected, as weakening demand for automotive components compounds slumping personal computer and smartphone sales.

Taiwan Semiconductor Manufacturing Company, the world’s largest chip producer, this week pushed back its expectations for a market recovery, as the industry bellwether projected its first decline in annual revenues since 2009.

After sales of electronics boomed amid widespread component shortages during the peak of the Covid-19 pandemic, industry stockpiles of chips have been building up since last summer.

“Semiconductor inventory adjustment in the first half of 2023 is taking longer than our prior expectation,” CC Wei, TSMC’s chief executive, told investors on Thursday’s quarterly earnings call. “It may extend into the third quarter [of] this year before rebalancing to a healthier level.”

After growing net revenues by 43 per cent last year, TSMC now expects sales to decline in the low- to mid-single digits for 2023.

TSMC’s gloomy outlook followed figures from the Semiconductor Industry Association earlier this month, which showed global industry sales fell 20.7 per cent in February 2023 compared to the same month last year, the sixth consecutive month of declines.

“We’re looking at . . . a typical downturn situation in the semiconductor industry, which actually hasn’t happened for a large number of years, where the supply just exceeds the demand,” said Peter Wennink, chief executive of ASML, the Dutch supplier of advanced chipmaking equipment, in a call with investors this week.

However, this time around, what Wennink described as a “classical semiconductor down cycle” is playing out on a much larger stage.

“There have never been more industries where semis are crucial to their business,” said Ben Bajarin, analyst at Creative Strategies, a Silicon Valley-based consultancy. That means the chip industry’s fluctuations are much larger today than during the last recession of 2008-09.

The PC industry has been particularly hard hit by a slowdown in consumer and corporate spending, with market researchers at IDC estimating a 29 per cent drop in the first quarter of this year compared with 2022. “It’s pretty much the worst PC year on record,” Bajarin said.

Smartphones had their fifth consecutive down quarter, with researchers at Canalys estimating a 12 per cent decline year-on-year, as consumer spending is pinched by inflation.

Next month, Apple is expected to report a 5 per cent drop in quarterly revenues, as weaker iPhone demand is coupled with a projected 25 per cent drop in Mac sales, according to analysts’ consensus expectations.

Amid a glut in components for personal electronics, the automotive industry continued to suffer shortages into the first few months of this year, making it a relative bright spot for chipmakers. However, even that market is “showing signs of softening into [the] second half of 2023”, TSMC’s Wei said.

Those comments, alongside Tesla’s price cuts, sent shares in Infineon and STMicroelectronics, among the largest semiconductor companies that supply the auto sector, down about 5 per cent on Thursday.

“Some investors feel this down cycle is being built on top of a fairly long up cycle,” said Amit Harchandani, semiconductor analyst at Citi. “Because the backlogs have gone up so much, they fear the drop is likely to be equally steep. It’s a bit nervous out there.”

Some chip companies are feeling the full force of that plunge. When it releases its latest quarterly figures next week, Intel is expected to report a 39 per cent year-on-year drop in adjusted revenues, a steeper decline than it reported in the wake of the 2008 financial crisis.

Nonetheless, executives at TSMC and ASML insisted the declines would bottom out this year. “All the platforms [say] their performance, their demand will increase in the second half,” Wei said. “We believe we are passing through the bottom of the cycle of TSMC business in the second quarter.”

One challenge for the semiconductor industry is that it is unable to increase production of its most sophisticated chips fast enough to take advantage of a huge surge in demand from artificial intelligence companies. That has led to a race among Big Tech companies and start-ups alike for powerful processors such as Nvidia’s H100.

Wei said TSMC, a supplier to Nvidia, had “recently observed incremental upside in AI-related demand, which helps the ongoing inventory digestion”. He pointed to a call from a customer in the “last two days” requesting a “big increase” in capacity. “We are still evaluating that,” he said.

“Nobody saw what was coming with ChatGPT in November,” said Bajarin of Creative Strategies. “You would have needed 18 months in advance to plan for that demand once you saw it.”

Longer term, ASML’s Wennink said he expected “another year of strong growth”, as chip manufacturers were maintaining their long-term roadmaps and capital spending plans despite the short-term challenges.

“Now the big question is with what speed, at what slope is this recovery? Well, I don’t know. But what I do know is that nobody thinks about this massive recession,” he said. “We just are in this period for one or two quarters more.”

Additional reporting by Anna Gross