The dilemma of the semiconductor world is underway

The semiconductor gold rush is coming to an end, and the dismal earnings of the past month are even more impressive.

Electronics giant Samsung saw a 69 percent drop in profit in the fourth quarter, while overall revenue fell 8 percent. Meanwhile, South Korean memory manufacturer SK Hynix released an equally dismal report a few days later. Both companies tell the story of macroeconomic forces holding back consumer spending and pushing DRAM and NAND flash inventories to unprecedented levels.

In short, where there was once a chip shortage, there is now an oversupply.

Intel, AMD, and Qualcomm's chips, which rely on DRAM and NAND flash memory, are inevitably similarly affected, with declines in major markets such as PCs, smartphones, servers, and gaming consoles. If customers don't buy memory, then they don't buy PCs and servers to install memory.

While the rapid deterioration of the semiconductor market may come as a surprise to some, this has been the case for months.

Micron was one of the first companies to succumb to market forces. After months of strong demand and promises to build tens of billions of dollars in new fabs, the company laid off a lot of workers, 4,800 after the first quarter, and 2023 earnings fell 88% from the same period last year, with a loss of nearly $200 million.

But even so, this is not the first sign that the chip bubble has burst. More than six months ago, industry watchers at TrendForce offered grim outlook for the memory market, warning of growing inventory of unsold products. Long before this week, memory vendors were heading for economic turmoil.

How did this happen?

Over the past three years, the semiconductor industry has been caught in a storm that has driven steady demand.

In the wake of the pandemic, within a few weeks, a whole remote work economy was born. Every technology and software company is scrambling to take advantage of this opportunity.

Security vendors have tailored products specifically for home offices; Notebook vendors cram higher-resolution cameras and microphones into their products; Software vendors like Teams and Zoom are scrambling to keep their services online. Whether directly or indirectly, all of these dynamics are driving semiconductor demand in some way.

Soon, the existing stock was emptied, the factory was closed due to the pandemic lockdown, and everything seemed to be in short supply. Within a year, the semiconductor supply chain was beyond its limits, and we were stuck in a chip shortage.

To make matters worse, for consumers one way or another, the latest generation of graphics cards at the time was particularly effective at mining cryptocurrency. While NVIDIA and AMD pretend to care about how difficult it is to buy a GPU, they are more than happy to collect the huge profits that graphics cards bring in every quarter.

In mid-2022, the bubble burst. When the Ethereum merger arrived, it was already getting easier to find components – basic but essential parts with lead times of less than 26 weeks and moving in the right direction. Within weeks, cryptocurrency valuations plummeted, and GPU prices fell with them.

That's good news for consumers, but the economy has started to cool. rising interest rates; The cost of living is rising; In Europe, the Russia-Ukraine conflict has pushed fuel and energy prices to record highs. Suddenly, people are no longer keen on buying another new PC or smartphone.

Within a few months, the demand for "high-margin" chips (CPUs and GPUs) disappeared. To be clear, the chip shortage is not over. It's just that the demand, especially for chips used in consumer hardware, disappears. The supply of many components, especially those used in power transmission and automotive environments, remains severely constrained.

The worst is yet to come

Given the current predicament, memory factory options are limited. Founder Wayne Lam of CCS Insights previously said that these companies have fairly long and complex supply chains and compete mainly in pricing and process technology.

Until the situation improves, Samsung and SK Hynix will focus on products such as LPDDR5, DDR5 and HBM used in mobile, next-generation server and high-performance computing products, which are expected to drive future demand.

In contrast, traditional fabs, such as those operated by TSMC and Samsung's fabs that are not dedicated to memory, have relatively short and straightforward supply chains. Lam explains that this gives them more flexibility to reallocate capacity to chips that need more.

Still, the next few quarters look grim. Over the past few weeks, chipmakers and foundry operators have been almost universally pessimistic about the outlook for the coming quarters.

Intel expects its revenue to fall to $11 billion and likely decline in the first quarter of 2023. At the same time, AMD expects flat first-quarter revenue and poor PC and gaming sales throughout fiscal 2023. And, this week Qualcomm once again accused no one of buying the phone because of its poor performance. Even TSMC is predicting a decline in revenue for the first time in four years.

The general consensus among these companies seems to be that things should start to improve again in the second half of 2023. But not everyone is so sure. In a recent report, SemiAnalysis's Dylan Patel predicted that inventory levels would not return to normal in the second quarter, and that the blank market for semiconductor companies would last longer than anyone expected.

"We believe there is about 15% downside in semiconductor valuations or significant lateral volatility before a true bull market begins," he wrote. "Days in stock are currently at an all-time high. Even higher than during the dot-com bubble and the 2008 financial crisis. It takes longer than two quarters to digest this inventory. ”

In a recent TrendForce report, analysts predicted that foundry revenue will contract by 4% in 2023 as wafer demand continues to dry up and inventory depletion slows.

When the semiconductor market does begin to recover, the next question will be how quickly it will recover. Barring another major event, it seems unlikely that we'll see a high level of IT investment over the past three years.

Why are all fabs affected?

Given that the semiconductor sector seems to be in danger, it may come as a surprise to many to see chipmakers such as Samsung, TSMC, and Intel move forward with fab projects.

These facilities are not cheap no matter how you think about it – even building a fab can often cost tens of billions of dollars. So, you would think that these were the first to be cut. Why are you building more fabs if no one is buying chips? But that's exactly what they're doing.

Intel may be trying to get more cash from the German government, where it is still working on building a new fab. Despite a poor quarter, Samsung said it is moving forward with the expansion of its foundry, including a new facility in Texas. SK Hynix has committed to building an encapsulation facility in the United States. TSMC scaled back its capital spending plans for fiscal 2023, but still plans to spend $32 billion to $36 billion on new infrastructure.

While this may sound like a lack of business acumen, it's important to keep in mind the scale and complexity of these facilities. They are not just buildings, but are filled with complex, highly regulated equipment that takes time to acquire, install, and verify. Most of the more than 20 fabs announced so far will not come online until 2025.

*Disclaimer: This article is the original author's creation. The content of the article is his personal opinion, we reprint only to share and discuss, does not mean that we agree or agree, if you have any objections, please contact the background.