By late last year, it was clear the semiconductor sector was heading into a slump. Three years of runaway demand and tight output was coming to an end, and companies right through the supply chain were suddenly caught with too much inventory as the global economy hit the brakes. Calling the bottom has been tough, and timing the rebound has multi-billiondollar repercussions.
Taiwan Semiconductor Manufacturing Co (TSMC) back in January forecast first-quarter revenue that was below the figure analysts had expected, with CEO CC Wei saying that demand was “softer than we thought three months ago”. He went on to note that the world’s most valuable chipmaker expected “the semiconductor cycle to bottom sometime in first half 2023, and to see a healthy recovery in second half this year”.
That same month, Samsung Electronics observed that “the business environment deteriorated significantly in the fourth quarter” and forecast “continued weakness in the short-term”, followed by the same timeline for a rebound.
In the US, Texas Instruments (TI), which designs and manufactures its own chips and has broad exposure to the electronics sector, provided a revenue outlook almost as disappointing as TSMC’s head of investor relations Dave Pahl noted, that “when customers begin reducing inventory, it’s never a one-quarter phenomenon”. Intel Corp was clear about the scale: “We’re expecting Q1 to be the most significant inventory decline at our customers that we’ve seen in recent history.”
Then in April, they delivered either first-quarter results or second-quarter outlooks that in one way or another disappointed already muted expectations. Most disconcerting is their failure to trim inventories, given the glut was a key reason for these gloomy forecasts. Intel, for example, provided revenue guidance ahead of analysts’ forecasts, but that is still a significant drop from a year prior and its own prediction for a loss was wider than expected. Its inventory levels are higher than a year ago.
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Add to this a more sedate recovery in end-demand from China’s reopening and you get a continuation of the bad news many hoped would have passed by now. While we are looking at just four specific companies here, the general trend persists throughout the industry, with just a few outliers.
Inventory levels
TI, for example, saw its stockpiles climb to 195 days of inventory. That’s a staggering 6.5 months.
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In an investor call last week, management downplayed this figure by saying its desired level is between 130 and 200 days of inventory. The Dallas-based chipmaker has experienced a bit of range-inflation over the past six years. As recently as 2018, it said the target was 115 to 145 days, but that figure progressively crept higher as the actual amount sitting on shelves climbed. Shortages and logistics problems over the past three years justify at least some of that upward revision, but they cannot paper over the fact that it is now sitting on a record US$3.3 billion ($4.4 billion) of inventories in the middle of the biggest downturn in a decade.
Intel’s view of the market highlights the uncertainty. After more than a year of sliding sales to PC makers, the Californian company thinks the declines may soon be over. But in servers and networking, where the most powerful and expensive chips get sold, there is worse to come. Overall, that means a 22% drop in the second quarter, it said, and analysts do not expect 3Q to see any growth. That makes it pretty hard to call the bottom right now.
Samsung sees a bit of uptick in memory shipment volume this period compared to the March quarter, but made the unusual move of declining to provide annual guidance because the outlook is too murky. Its Taiwanese rival is more confident: “We believe we are passing through the bottom of the cycle of TSMC business in the second quarter.” TI declined to make an attempt: “We don’t try to predict where the bottom or the top is.”
Expensive bet
Despite all this uncertainty, chipmakers have been loath to cut capital expenditure budgets. The strategy appears to be based around ensuring enough capacity is on hand for that moment in the future when consumers and corporations start buying smartphones, servers, PCs and games consoles again.
But this is an expensive bet. The price of these tools is accounted for as depreciation on the income statement and is often the single-biggest line item in the cost of goods sold. In past periods of weakness, manufacturers would often push back delivery of the gear they had ordered to delay installation and control the timing of when these expenses would hit earnings. But with continued tightness in the supply of equipment, it may be that they are not willing to cancel or postpone and would rather risk slimmer margins than missed orders from clients.
For now, that’s not a problem. A quarter’s or two’s delay, especially during the industry’s low season, will not cause too much harm. But if we see end-demand failing to materialise in the next few months and inventories remaining high into the second half, then those who are quickest to take drastic action will be the ones most richly rewarded. — Bloomberg Opinion
