Signs are piling up that the tech downturn may be deeper and longer-lasting than feared.
After years of record capital spending, chip makers are warning on a weekly basis that demand is sputtering. In the latest sign of trouble, Samsung Electronics and AMD reported disappointing results within hours of each other that widely missed projections.
Samsung — the world’s largest memory chip maker — reported a 32% dive in operating income, while PC-processor chip maker AMD said it will miss its earlier forecast by about US$1-billion. Analysts’ reactions ranged from “breathtaking” to “Uff-da!”.
Those numbers followed grim comments from memory makers Micron Technologies and Kioxia Holdings, which are slashing spending and output in a bid to stabilise plummeting prices. AMD shares fell, spurring losses in chip and PC makers from TSMC to Lenovo Group on Friday.
“It seems end demand has likely deteriorated markedly in recent weeks, and end customers appear to be aggressively draining inventory,” Bernstein’s Stacy Rasgon said. The cut in AMD’s client-revenue “is admittedly a bit breathtaking”.
Weaker-than-expected demand for consumer electronics is hitting companies along with surging shipping and materials costs. Cost-cutting has become the new norm across the tech industry, and businesses that hoarded chips during the pandemic are now opting to cancel or postpone orders and tap inventory.
Geopolitics
The semiconductor industry is also grappling with export restrictions from the US government, which is ratcheting up pressure on its allies to prevent shipment of cutting-edge chips to a growing list of Chinese companies, as it seeks to contain the Asian country. That’s hampering business for chip makers from AMD to Nvidia in the world’s biggest semiconductor market.
“This downcycle is not merely driven by typical supply and demand dynamics. It’s different from the past cycles due to geopolitical risks,” said Heo Pil-Seok, CEO at Midas International Asset Management in Seoul. “The US government’s exports controls would further limit IT companies’ sales in China and a large chunk of demand for chips will be weakened. If AMD and Nvidia can’t sell their chips in China, memory makers’ earnings will deteriorate further.”
Read: Samsung earnings slump on rapid drop-off in chip demand
The companies themselves are bracing for a prolonged downturn. Samsung’s chip business head, Kyung Kyehyun, said he doesn’t see the memory market rebounding throughout next year. Kyung told employees at an internal event that Samsung cut its guidance for chip sales in the second half of this year by 32% compared to a forecast in April, according to the Korea Economic Daily.
Read: AMD revenue warning signals deep chip slump
“No party lasts forever,” Rasgon said. “It’s a cyclical industry. There were a few years of very, very strong growth” that prompted companies to ramp up capacity. “You build supply for demand that turns out not to be as real as you thought it was.” — Sohee Kim and Peter Elstrom, (c) 2022 Bloomberg LP