Chipmakers that were once in high demand are faced with sudden challenges

A few months ago, computer chip makers seemed to be at the forefront of the world.

Customers couldn’t get enough of the small silicon wafers that act as the brains of computers and are needed in almost every device with an on/off switch. Demand was so strong — and U.S. dependence on a foreign manufacturer so worrying — that in July Democrats and Republicans agreed on a $52 billion subsidy package that included grants to build new chip factories in America.

US chipmakers such as Intel, Micron Technology, Texas Instruments and GlobalFoundries promised huge expansions in domestic manufacturing, betting on growing demand for their products and the prospect of government subsidies.

But shipments of some semiconductors have been picking up lately, which could be good news for consumers but not for industry executives. Their bold investment plans have met a sudden and unexpected slowdown in consumer demand for electronic devices, new US sales restrictions on customers in China, rising inflation, and the unusual prospect of simultaneous shortages of some chips and oversupply of others.

This has resulted in chipmakers who had been looking forward to immense demand and opportunity suddenly being faced with immense challenges. Many of the companies are now faced with complex questions about whether and when to ramp up production, given the uncertainty of how long the current decline in sales could last.

“Six months ago I would have said we’re in this hyper-growth phase,” Rene Haas, chief executive officer of Arm, the British company whose chip technology powers billions of smartphones, said of the broader industry. Now he said, “We’re on a break.”

For many consumers, products that were in short supply due to a lack of chips may become more available, although not immediately. Automakers, which have struggled to make enough cars with shortages of chips and other components, said they’re getting more but still face some problems. Smartphone and computer prices could also fall as chip supply grows and the prices of two types of memory chips they use fall.

But at the moment, not everyone is able to get all the chips they need, and prices for many types of semiconductors remain high. “We’re still well above pre-pandemic prices,” said Frank Cavallaro, chief executive of A2 Global Electronics and Solutions, a chip distributor.

The fear of a slump that has plagued semiconductor stocks this year is evident in recent earnings reports from chipmakers. South Korea’s SK Hynix on Wednesday reported a 20 percent drop in sales and said its memory chip business “is facing an unprecedented deterioration in market conditions.” Intel on Thursday provided further evidence of a decline in its third-quarter results, including a 20 percent decline in revenue and a $664 million charge to cover cost-cutting measures that are expected to include job cuts.

The Biden administration struck a blow of its own this month with sweeping restrictions aimed at preventing China from using US chip-related technology. The measures limit sales of some advanced chips to Chinese customers and prevent US companies from helping China develop some types of chips.

That’s hurting semiconductor companies like Nvidia, which make graphics chips that run AI applications in China and elsewhere. The Silicon Valley company, which is already suffering from a sharp drop in video game application sales, recently estimated that U.S. restrictions would likely cut sales by about $400 million in the current quarter.

The sanctions could hit even harder companies that sell chipmaking equipment, which have relied heavily on sales to Chinese factories in recent years.

Lam Research, which makes tools used to etch silicon wafers to make chips, estimates restrictions in China would reduce its sales by $2 billion to $2.5 billion in 2023. “We’ve lost some very profitable customers in the China region and will continue to do so,” Lam’s chief financial officer Doug Bettinger said during a conference call last week.

Applied Materials, the largest maker of chipmaking tools, also said sales would suffer due to the restrictions. On Wednesday, another chipmaking tool maker, KLA, said its revenue is likely to shrink by $600 million to $900 million next year as it cuts sales of equipment and services for some customers in China.

Concerns about foreign competition are nothing new in the semiconductor industry, an industry known for boom-and-bust cycles. But it has seldom seen a player as powerful as Taiwan Semiconductor Manufacturing Company, whose factories on the island produce chips developed by the likes of Apple, Amazon, Nvidia and Qualcomm.

China claims Taiwan as its own territory, posing a potential risk to chip shipments. This helped spur recent bipartisan support for US chip legislation, which was heavily pushed by President Biden.

He traveled to Ohio last month to break ground on a $20 billion Intel manufacturing campus. On Thursday, President Biden visited a site near Syracuse, NY, where Micron has pledged to spend up to $100 billion over 20 years on a large complex to build memory chips, a project he called ” one of the most significant investments in American history.”

Those facilities will eventually be needed, industry executives said. But they are now struggling with the sudden and sharp drop in chip demand. The problem is particularly acute with processors and memory chips that perform calculations and store data in PCs, tablets, smartphones, and other devices.

These products have been hot commodities as consumers have been working from home during the coronavirus pandemic. But that boom has since cooled, with PC sales down 15 percent in the third quarter, according to International Data Corporation estimates. The research firm also predicted that smartphone sales would fall 6.5 percent this year. Demand has been dampened by both inflation and a protracted Covid lockdown in China, analysts said.

At the same time, stocks of chips were piling up. Computer manufacturers, spooked by shortages, bought more components than they actually needed, said Dan Hutcheson, market researcher at TechInsights. As customer demand subsided, they began cutting back on orders.

“You see several issues coming together,” said Syed Alam, who leads Accenture’s global high-tech consulting practice, including semiconductors.

Handel Jones, managing director of International Business Strategies, predicts that total chip industry sales will grow by 9.5 percent this year. But he expects sales to fall 3.4 percent next year to $584.5 billion. Last year he forecast steady annual growth for the chip industry from 2022 to 2030.

Among the red flags were Intel’s second-quarter results, which were announced in July. The company posted a rare loss and a 22 percent drop in sales, blaming its own missteps and customers cutting chip inventories.

At Micron, too, the mood changed quickly. In May, the company made optimistic presentations about long-term demand for its memory chips at an investor event in San Francisco. Over the next month, it warned of slowing demand and falling chip prices.

In September, the company reported a 20 percent decline in fourth-quarter sales. In addition, planned spending on factories and equipment has been cut by nearly 50 percent in the current fiscal year.

The surge in demand appears to be undermining Micron’s widely publicized expansion plans, which include the Syracuse complex and a new $15 billion factory in Boise. But chipmakers often juggle different timelines. Because new factories take about three years to complete, waiting too long to build can leave them understaffed when sales pick up.

“The long-term prospects for memory and storage are robust,” said Mark Murphy, Micron’s executive vice president and chief financial officer. The cuts in short-term capital spending, he added, are a necessary response “to match our supply with demand.”

Intel’s situation is even more complex. The company has a new manufacturing campus in Ohio and a plant expansion planned for Germany in Arizona, Oregon, New Mexico, Ireland and Israel underway. Intel is also determined to compete with TSMC in manufacturing for other companies and make chips it develops.

Intel now plans to construct factory buildings while holding back the purchase of the costly machines within, which represent a much larger expense.

Those purchases can be tailored to meet emerging demand for specific types of chips, said Keyvan Esfarjani, Intel’s executive vice president, who oversees the construction and operations of its factories. He said the long-term need to reduce the US and Europe’s reliance on Asian-made chips is too important to be halted by short-term economic cycles.

“This goes beyond Intel,” Mr. Esfarjani said in an interview last month. “This is important to the people, to the communities, to the United States. It is important for national security.”

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