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At the end of last year it was clear that the semiconductor sector was headed for a slump. Three years of galloping demand and tight production were drawing to a close, and companies across the supply chain were suddenly faced with overstocking as the global economy hit the brakes. Bottoming out has been difficult, and the timing of the recovery has implications worth billions.
Taiwan Semiconductor Manufacturing Co. previously forecast first-quarter sales in January to come in below analysts’ expectations, with chief executive officer CC Wei saying demand was “weaker than we thought three months ago.” He added that the world’s most valuable chipmaker “expects the semiconductor cycle to bottom out sometime in the first half of 2023 and see a healthy recovery in the second half of this year.”
In the same month, Samsung Electronics Co. noted that “the business environment deteriorated significantly in the fourth quarter” and forecast “sustained short-term weakness” followed by the same timeline for a recovery.
In the US, Texas Instruments Inc., which designs and manufactures its own chips and has a broad presence in the electronics sector, provided a sales outlook almost as disappointing as TSMC’s. Dave Pahl, Head of Investor Relations, noted, “When customers start reducing inventory, it’s never a quarter phenomenon.” was clear on the magnitude: “We expect Q1 to be the most significant inventory decline at our customers that we have seen in recent history.”
Then, in April, they delivered either first-quarter results or second-quarter guidance, which in one way or another disappointed already muted expectations. Most troubling is their failure to reduce inventories, as the flooding was a key reason for these gloomy forecasts. Intel, for example, issued a revenue forecast ahead of analysts’ forecasts, but that’s still a significant decline from a year ago, and its own loss forecast was larger than expected. Inventories are higher than a year ago.
Add to that a quieter recovery in final demand following China’s reopening and you have a continuation of the bad news that many hoped was now gone. While we only look at four specific companies here, the general trend continues across the industry, with only a few outliers.
Texas Instruments, for example, saw its inventories grow to 195 days of storage. That’s an incredible 6.5 months.
In an investor call last week, management downplayed that figure, saying the desired level is between 130 and 200 storage days. The Dallas-based chipmaker has seen some assortment inflation over the past six years. As recently as 2018, the target was said to be 115 to 145 days, but that number kept rising as the actual amount on shelves increased. Bottlenecks and logistics issues over the past three years justify at least part of this upward revision, but can’t hide the fact that the company is now sitting at a record $3.3 billion in inventories amid its biggest downturn in a decade.
Intel’s view of the market underscores the uncertainty. After more than a year of declining sales to PC makers, the Californian company believes the declines could soon be over. But for servers and networks, where the most powerful and most expensive chips are sold, things will get worse. Overall, that translates to a 22% decline in the second quarter, and analysts don’t expect growth in the third quarter. That makes it quite difficult to name the floor now.
Samsung sees a slight increase in memory shipment volume during this period compared to the March quarter, but took the unusual step of declining full-year guidance because the outlook is too bleak. The Taiwanese rival is more confident: “We think we’re going through the bottom of the TSMC business cycle in the second quarter.” TI declined to try: “We’re not trying to predict where the bottom or the top is.”
Despite all this uncertainty, chipmakers are reluctant to cut investment budgets. The strategy seems geared toward providing enough capacity for the moment in the future when consumers and businesses start buying smartphones, servers, PCs, and gaming consoles again.
But that’s an expensive bet. The price of these tools is recorded as depreciation in the income statement and is often the largest single item in the cost of goods sold. In earlier periods of weakness, manufacturers often postponed the delivery of ordered equipment to delay installation and control when those expenses would eat into revenues. But with continued equipment supply shortages, they may not be willing to cancel or postpone, preferring to risk lower margins than missed customer orders.
At the moment this is not a problem. A quarter or two late, especially during the industry’s off-season, won’t do too much harm. But if we see final demand fail over the next few months and inventories stay high into the second half, then those who take drastic action quickest will be richestly rewarded.
More from the Bloomberg Opinion:
• Moore’s Law keeps chip leader Tim Culpan one step ahead
• Stocks beat cash even if they could time a recession: Nir Kaissar
• China’s recovery so far: Struggling, can do better: Daniel Moss
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Tim Culpan is a columnist for Bloomberg Opinion covering technology in Asia. He was previously a technology reporter for Bloomberg News.
For more stories like this, visit bloomberg.com/opinion
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