Shulou(Shulou.com)11/24 Report--

According to Bloomberg, chip companies are preparing for the coming severe recession and there will be a major shift in the semiconductor industry in the coming months-from a previous record surge in sales to the worst decline in a decade.

During the epidemic, orders in the semiconductor market increased significantly, sales and stock prices repeatedly hit record highs, and manufacturers around the world were scrambling for orders and production capacity. While it is hoped that this boom will last for several years, it is clear that chipmakers are now facing a familiar and cruel problem: rising inventories and shrinking demand.

This is a recurring cyclical dilemma in the semiconductor industry, where it takes years to build a chip factory, and they are not always online when they are needed most. The core problem of the past few years has been a shortage of supply, and even now, some companies, such as carmakers, still face structural shortages of electronic components.

But for chipmakers, the wind has changed.

01. The worst decline in a decade? Citigroup analyst Christopher Danely even made a slightly exaggerated prediction that the decline in the industry would be the worst in at least a decade or even 20 years, with every company and every chip category likely to be affected.

According to Bloomberg, the last similar recession occurred in 2019 and usually does not last long. But the impact is expected to be particularly pronounced because of the weakness of the global economy. If inventory adjustments occur as the economy slips into recession, the semiconductor industry will not be able to rebound as quickly as it did after the last recession.

▲ Total income changes in the Semiconductor Industry from 1998 to 2021 (figure Source: Bloomberg)

However, TSMC, the world's largest wafer foundry, made a different forecast during its latest earnings conference that there would be a typical cycle of decline in chip demand in 2023, but the overall decline would not be more severe than in 2008.

Both TSMC and SMIC, Chinese mainland's largest foundry, have judged that this round of cyclical adjustment is expected to continue into the first half of 2023, and that excess inventory in the semiconductor supply chain will take several quarters to rebalance to a more reasonable level, while conveying confidence in future demand growth.

Liu Deyin, chairman of TSMC, revealed during the earnings meeting that although demand for consumer electronics chips has weakened, TSMC's capacity will remain fully loaded this year amid strong demand for automotive chips and high-performance computing chips.

SMIC predicts that the demand growth of the integrated circuit industry and the trend of global regionalization will remain unchanged, although there will be short-term adjustments, but the long-term logic of local manufacturing will remain unchanged. SMIC is still full of confidence in its medium-and long-term growth.

But unlike the steady and strong performance of these chipmakers, the industry signals from a number of chip design companies are not optimistic. Revenue from the gaming business of American GPU giant Nvidia has fallen by more than 30%, and Micron, the US memory chip giant, has warned that demand in many areas is rapidly disappearing.

On the same day Micron told investors that chip demand was weakening, US President Joe Biden signed the American Chip and Science Act. This is "a bit of a dark humor" according to Stacy Rasgon, an analyst at Sanford C. Bernstein, a research firm.

"politicians will find out how quickly the shortage can resolve itself when the industry turns." In the end, says Rasgon, no one really knows what's going to happen. This is the chip industry, where everyone is not good at forecasting demand, first too optimistic, then too pessimistic.

02. Chip shipments plummeted, Qualcomm cut a single price under the two-pronged haze shrouded in chip manufacturers, from the sharp decline in downstream market demand. Bloomberg compared the change in the human computer (PC) industry, one of the biggest buyers of chips, to "a harbinger of the dark ages".

Shipments of desktop processors fell to their lowest level in nearly 30 years in the second quarter, with total processor shipments experiencing the biggest year-on-year decline since 1984, according to market research firm Mercury Research. According to market research firm CINNO Research, about 134 million smartphone SoC terminals were shipped in China in the first half of 2022, down about 16.9% from the same period last year.

This is a painful hangover after the epidemic blockade, a trend that fuelled demand for PC and other devices as many people switched to working from home, when chipmakers received near-soft orders and had to solve thorny supply chain problems. Chip buyers are also very arrogant and willing to pay higher prices for chips.

But now, consumer demand is weakening, and accordingly, chip buyers are starting to cut orders, resulting in what the industry calls "inventory corrections."

Us mobile chip giant Qualcomm is going through a bargain, reducing its flagship mobile chip Snapdragon 8 series orders by about 15% and will cut the price of its two flagship mobile chips by about 40% by the end of the year, CCTV Finance reported. South Korean memory chip giant Samsung is also trying to clear inventory to reduce the impact of weakening demand for consumer electronics on memory chip shipments.

The latest results from TSMC, the world's largest wafer foundry, also reflect the downturn in the consumer electronics market. The smartphone business is no longer TSMC's largest source of revenue in the latest quarter, and its share is expected to continue to decline in the future.

According to the data of China's National Bureau of Statistics, the monthly output of integrated circuits in China has declined month by month since it reached its peak in August 2021, and in July 2022, domestic production of integrated circuits plummeted by 16.6%. Downstream smartphone production and microcomputer equipment production fell by 9.1% and 6.0% respectively in the same month.

The South Korean market also showed signs of slowing technology demand: smartphone sales in South Korea fell 29.2 per cent in July from a year earlier, exports of computers and auxiliary equipment fell 21.9 per cent, and shipments of memory chips led the decline by 13.5 per cent.

03. From competition between companies to competition between countries. "this will be a serious recession." "it used to be a competition between companies, but now it's a competition between countries because of strategic importance," said Gus Richard, an analyst at Northland Securities.

A different factor this time is that governments in the heartland of the global semiconductor industry are heavily subsidizing new factories and equipment. Companies such as Intel have lobbied for chip legislation, saying the US needs to be more competitive with Asian manufacturers. Now, they are ready to start adding new capacity when demand is unstable.

According to the "Mid-year Total Semiconductor equipment Forecast report" released by the International Semiconductor Industry Association (SEMI), the total global semiconductor manufacturing equipment sales of original equipment manufacturers will reach a record $117.5 billion this year, an increase of 14.7 percent over the same period last year. This figure is expected to rise to $120.8 billion next year. Taiwan, Chinese mainland and South Korea are expected to remain the top three buyers of equipment in 2022.

▲ 2022 Semiconductor equipment Segmentation Market Forecast (Picture Source: SEMI)

Due to the high upfront cost, the chip manufacturing industry is becoming more and more unstable. The $20 billion chip factory needs to operate 24 hours a day and must be rewarded quickly within a few years before it becomes obsolete. With the increasing barriers to capital investment and technology, there are very few companies with cutting-edge technology. TSMC, Samsung Electronics and Intel account for most of the production capacity of advanced chip manufacturing.

▲ TSMC revenue trend (figure source: Bloomberg)

These companies have timely increased their production lines and made the supply chain as efficient as possible. But efforts to build large-scale chip production lines at home in the US and Europe could undermine the balance that has been achieved and has been achieved by the chip industry in this pursuit of efficiency.

Some industry insiders or analysts are not optimistic about US support for local chip manufacturing. For example, Jason Pompeii, an analyst at Fitch Ratings, believes that the industry "has actually established duplicate supply chains in the US and Europe" and that the short-term risk is that overinvestment in capacity leads to an economic downturn.

However, chipmakers are generally optimistic about long-term demand, and the total revenue of the global semiconductor industry is expected to exceed 1 trillion US dollars by the end of 2030. According to this calculation, the construction of chip factories on a large scale is likely to be worth the investment.

04. Conclusion: the chip industry has entered a cyclical downturn. Generally speaking, the chip hoarding boom caused by the imbalance between supply and demand is returning to rationality. With the easing of the epidemic, the problem of core shortage has been gradually alleviated as chip manufacturers have built new production lines one after another. However, the trend of market weakness is difficult to reverse, and the chip industry is entering a downward cycle.

In the long run, people are optimistic about the future of the chip semiconductor market, and emerging markets such as cloud computing and smart cars will generate stronger demand for chips. But the uncertainty is that the global chip manufacturing industry is involved in an unprecedented geopolitical storm, and its impact on the future direction of the semiconductor industry is still unknown. National chip-related incentive policies and the process of supporting local chip suppliers will continue to be the focus of attention.

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