On January 4, 2022 local time, in Las Vegas, the United States, Qualcomm announced during CES 2022 that it would cooperate with Microsoft to design customized AR chips and integrated software platforms, with the aim of expanding and accelerating the development of AR technology and bringing low-power, lightweight, immersive designs to the next generation of AR glasses. Figure/IC photo

On November 13, the Financial Times reported that Qualcomm was pessimistic about the current chip outlook and cut its revenue forecast for this quarter by 25%. According to Akash Palkivala, the chief financial officer of Qualcomm, the chip industry is "moving from a shortage of supply to a decline in demand". This dramatic change in the industry outlook in a short period of time can be said to be "unprecedented".

Earlier this month, Qualcomm CEO Cristiano Amon said in a conference call with investors that the chip industry is facing a macroeconomic headwind that "we cannot escape". In this regard, Qualcomm announced the implementation of a recruitment freeze and will further reduce operating expenses.

Qualcomm is not the only chip giant to feel the cold wave.

At the beginning of November, American Chaowei Semiconductor announced an operating loss of $64 million in this quarter. A month ago, the company's stock price fell 13.9% overnight and its market value evaporated by $15.18 billion due to the lower income forecast given in its preliminary financial report, with a cumulative decline of nearly 60% this year. Micron Technology predicts that the company's revenue from September to November this year will drop 45% year-on-year to 4.25 billion dollars. In Q3, Intel's turnover fell by 20%, launched the plan of layoff by 20%, and officially launched the "cold winter mode".

At present, many international financial institutions have publicly said that the chip industry is likely to enter a recession cycle due to high inventory and low market demand. Citibank even said that this may be the most serious decline in the chip industry in more than 20 years.

However, there are many kinds of chip industries. Careful observation shows that the chip industry in the United States and other places is actually a state of coexistence of overproduction and supply shortage.

Excess chip production in consumer electronics

Based on the analysis of major research institutions, the chips with excessive inventory leading to sharp price drop are mainly concentrated in mobile phones, computers, game consoles and other consumer electronics fields. The main reason is the isolation and other consequences of the epidemic, which cause inconvenience to production and life, leading to a surge in demand for digital services and products. However, this demand has basically reached the bottleneck, and the follow-up is weak.

Most of the panel chips, communication chips, analog chips and other types in this field have fallen by more than 20% in the past two months, and some chips have fallen by more than 80%. For example, global desktop processor shipments fell to the lowest level in nearly 30 years in the second quarter of this year; In 2021, MediaTek, the world's largest mobile phone system chip SoC shipment, announced that it would cut 30% of its orders in the second half of 2022.

On the other hand, the chip shortage caused by the supply chain crisis also stimulated enterprises to accumulate inventory and place orders beyond the normal business volume, which aggravated the short-term demand surge overproduction cycle. On this basis, according to the analysis of relevant research institutions, since the epidemic, a large number of funds have appeared in the chip market to hype chips and drive up prices. The end of such speculation is bound to be the collapse of prices. Since March 2022, the market price of some Texas instrument analog chips has dropped by as much as 80%.

Short term demand surge and supply chain crisis, the market signals released by these factors make Micron, Qualcomm and other enterprises more optimistic about the prospects of the industry, and to some extent, ignore the crisis behind the prosperity of market demand. In 2021, Sanjay Mehrotra, CEO of Micron, said publicly that he judged that because of the "different industries" in which the chips are located, and "Micron is also very different", the company's business is not vulnerable to the impact of the industrial demand surge - overproduction cycle.

Changes in other related industries have also exacerbated the redundancy of some chip capacities. The mining process of many cryptocurrencies, including Ethereum, has always been in great demand for GPUs worldwide. According to the analysis of White Rock Management, a Swiss digital asset technology company, it accounts for about 20% of the GPU capacity. However, at the beginning of 2022, Ethereum announced that its operation protocol was switched from workload proof PoW to equity proof PoS, that is, GPU was no longer needed to maintain the operation of Ethereum blockchain.

According to the analysis of Cointelegraph, the GPU sales of Nvidia, the industry leader, decreased by 75% compared with 2021 within two months after the news was released because large mining enterprises stopped buying GPU.

On August 9, 2022 local time, in Washington, the United States, President Biden signed the Chip and Science Act at the White House and delivered a speech. Figure/IC photo

Shortage of supply in such fields as automobiles

Against the background of slowing global economic growth and weakening consumer demand, the chip industry as a whole has experienced a downward trend of oversupply. However, as the "grain of modern industry", the supply of chip industry is not "the same hot and cold" in the whole industry, but "the sun rises in the east and the rain falls in the west". The situation of "chip shortage" in automobile, new energy and other fields is still serious.

The shortage of chips used in the automotive industry is most significant. According to the research of McKinsey Consulting, the demand for most automotive wafers will involve chips at nodes of 90nm and above. Because the profit margin of this part of production capacity is relatively low, the motivation for market investment in development is not strong at the beginning of the epidemic. However, the global chip production capacity is relatively fixed in the short term. Since the epidemic, due to the surge in demand for other types of chips, such as consumer electronics products, the production capacity of car specification chips, which have higher reliability requirements, longer certification cycles, and certain manufacturing barriers with consumer chips, has also been affected.

The result is a serious shortage of chips in the automotive industry. According to the research of Susquehanna Financial Group, the delivery cycle of power management components, microcontrollers and other chips at vehicle specification level will continue to rise in 2022, reaching 32 weeks in the first half of this year.

Since this year, Toyota, Volvo and other auto companies have faced production stoppage due to chip shortage. This year, General Motors and Ford have started to sell "incomplete cars", namely, cars with missing functions due to the lack of some chips, and promised to install the missing chips within a year. According to the statistics of AlixPartners, a consulting company, the shortage of chips has reduced the global automotive industry revenue by 110 billion dollars in 2021.

In addition, according to the 36 krypton report, at present, the new energy power chips are in short supply because the industry is in a boom cycle. In particular, IGBT (Insulated Gate Bipolar Transistor), which is used in automobiles and new energy sources, presents a situation of "double wheel drive, with both quantity and price rising".

The development of the chip industry is characterized by a typical boom recession cycle, mainly because of the expansion of its production capacity. For example, building a new factory often takes three to five years to complete. Once the demand for current production capacity is not matched, market behavior will drive the industry into the next round of economic cycle.

In August this year, when US President Biden signed the Chip and Science Act worth 52 billion US dollars, he announced that he would provide subsidies for US chip production. In the same month, Micron, the largest memory chip manufacturer in the United States, admitted at the investor meeting that global demand for chips was weakening. Political power undoubtedly further magnified the risks of the current chip industry.

Faced with these risks, the Economist wrote in October this year that since July, about 30 of the largest chip companies in the United States have jointly lowered their revenue expectations for the third quarter from $99 billion to $88 billion. This year, the total market value of listed chip enterprises in the United States has evaporated by more than 1.5 trillion dollars. On this basis, the restrictions imposed by the United States on China may also cause these enterprises to lose their largest market. The future of the chip industry is therefore more bleak.

At present, according to the assessment of many institutions, the global chip industry may not complete the clearing phase of excess products until the second half of 2023, when its overall weak trend may improve.

As far as the development trend is concerned, senior industry executives such as Akash Palkiwara, the chief financial officer of Qualcomm, and Chris Inevsky, the application director of Redlen Technologies, agreed that the long-term prospects of the industry remain good, with total sales reaching more than $1 trillion by 2030. At present, the development of the global chip industry has reached the "semi final stage". The boom bust cycle is an inherent factor. Enterprises should focus on the growth pole layout of renewable energy, electric vehicles, Internet of Things equipment and other industries in the next stage, and strive to achieve a balance between short-term difficulties and long-term growth expectations.