Pandemic boom turns to bust as recession looms

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Declining business: Technicians inspect a piece of equipment during a tour of the Micron Technology automotive chip manufacturing plant in Virginia. The tech giant warns that demand is evaporating fast as the industry faces the familiar problem of growing inventory and shrinking demand. — AP

SHANGHAI: Even in an industry famous for its roller-coaster cycles, chipmakers are bracing for a particularly severe shift in coming months, when a record-setting sales surge is threatening to give way to the worst decline in a decade or more.

The semiconductor market enjoyed a massive run-up in orders during the pandemic, sending sales and stock prices to new highs and triggering a global scramble to find enough supplies.

There was hope in some circles that the boom could be sustained for several more years without a painful pullback, but chipmakers are now facing a familiar problem – growing inventory and shrinking demand.

It’s a dilemma as old as the computing age. It takes years to build a chip plant and they don’t always come online when they’re most needed.

In the last few years, the problem has been a lack of supply. As recently as this quarter, carmakers and some other customers were complaining that they still couldn’t get enough electronic components.

Annual declines

But fortunes have turned swiftly for the biggest chipmakers. Companies like Nvidia Corp are reporting more than 40% annual declines in their core businesses, while Micron Technology Inc warns that demand is evaporating fast in many areas.

The treachery of the semiconductor cycle was driven home when United States President Joe Biden signed the US$52bil (RM232bil) Chips and Science Act to subsidise domestic production – on the very day that Micron, America’s biggest maker of memory chips, told investors demand was fading.

“It’s sort of darkly humorous,” said Sanford C Bernstein analyst Stacy Rasgon.

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“The politicians are going to find out how quickly shortages can resolve themselves when the industry turns.”

Personal computer (PC) makers, some of the biggest buyers of chips, were the harbingers of darker times.

Desktop processor shipments dropped to their lowest level in nearly three decades in the second quarter of this year, according to Mercury Research.

Painful hangover

Total processor shipments experienced their largest year-over-year falloff since about 1984.

It’s a painful hangover following pandemic lockdowns, when the work-from-home trend spurred demand for PCs and other devices.

Chipmakers had been rushing to keep up with a flood of orders and supply-chain snags made customers even more desperate.

Manufacturers of electronic devices were willing to buy chips at whatever price they could.

Now consumers are cutting down on big-ticket purchases and chip buyers are following suit. That’s creating what the industry calls an “inventory correction.”