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The silicon goldrush is coming, but chip demand is evaporating

Leave it to the economy to throw another wrench into the semiconductor supply chain

In the US, chipmakers and suppliers are scrambling to find a place in line for the more than $52 billion in subsidies and tax breaks up for grabs but that surge in semiconductor demand appears to be faltering.

Like so many other aspects of the chip business, timing is everything. But with shifting sands ranging from supply to backlogs, the semiconductor industry is about to enter precarious territory.

As we've seen in other industries during normal economic times, a supply chain issue is solved by increasing supply or curbing demand. But as the global economy recovered from the COVID-19 pandemic over the past two years, the only viable option appeared to be the former — build as much capacity as possible, as fast as possible.

As supply lines dried up and everything from automobile manufacturing to PC, server, and networking sales were met with lead times that stretched well beyond the horizon, foundry operators reprioritized and announced hundreds of billions in new fab capacity.

Intel has announced north of $40 billion in spending to date with another $80 billion planned over the next decade, and that's just in the US.

Samsung and TSMC are expanding their presence in Texas and Arizona, respectively. Meanwhile, memory vendors SK Group — the parent company of SK Hynix — and Micron have announced expansions of their own. Micron, just this week, said it would spend $40 billion to grow its fab footprint in the latter half of the decade in anticipation of a healthy slice of the newly announced subsidies.

But now, rising inflation and a deepening recession appear to have thrown yet another wrench in the works.

Demand dissolves

Before any of these fabs have come online, or in many cases even broken ground, demand for semiconductors has slowed in response to macroeconomic uncertainty. The consequences of this are a little counterintuitive, depending on which market you're looking at. In some spaces, it's getting easier to get certain chips. Not because there's suddenly more foundry capacity, but because fewer people want them.

For months, GPUs were selling for 2-3x their MSRPs amid a cryptocurrency mining blitz. When the crypto craze collapsed earlier this summer, the appetite for GPUs plummeted and with it the exorbitant prices they once commanded.

So what happened? Seeing unprecedented demand for GPUs, Nvidia and AMD ramped up their foundry commitments to ensure an adequate supply of silicon. Only this came back to bite them when both chipmakers reported sliding demand for GPUs.

Nvidia this week reported a 44 percent decline in its gaming unit, and charges of $1.32 billion related to inventory and related reserve. AMD faired better, but still expects a steep decline in gaming and PC sales over the next few quarters.

It was falling PC sales that Intel blamed in large part for its Q2 losses, which saw the company's client computing group revenues slide 25 percent from the prior year.

Watch the memory

While these trends might paint the picture that the chip shortage is finally on its last leg, the reality is far more complex.

As it stands, PCs, gaming, and even datacenter hardware like CPUs, GPUs, and other accelerators occupy only a small subset of the diverse semiconductor market.

By comparison, commodity components like NAND and DRAM memory, which are deployed in nearly every electronic device sold today, may offer a broader picture.

"Given the use of DRAM and NAND, we can definitely surmise that the demand for products that ultimately use these chips is softening. From that perspective, it is a leading indicator as to the future demand for all other semiconductor products," CCS Insights analyst Wayne Lam told The Register.

DRAM and NAND flash pricing is expected to take a tumble over the next few quarters, and the past few weeks' earnings calls have only served to back up those claims.

During Micron's Q3 earnings call in late June, the company's otherwise strong quarter was overshadowed by a pessimistic outlook.

"Despite the strong end demand, we are seeing some enterprise OEM customers wanting to pare back their memory and storage inventory due to non-memory component shortages and macroeconomic concerns," CEO Sanjay Mehrotra told investors.

The company's outlook grew even more dire yesterday, when Micron CFO Mark Murphy offered a revised outlook that showed it was more than "some enterprise OEM customers" after all.

Micron isn't an isolated case either. In its most recent earnings call, Samsung reported eroding demand for memory, especially in the PC electronics segment.

Looking ahead to the second half of 2022, Ben Suh, SVP of investor relations at Samsung, said the company was operating under the assumption that "macro uncertainties are unlikely to dissipate."

And Han JinMan, who leads Samsung's memory business, blamed the lower-than-expected DRAM and NAND shipments on a weakening demand for PC and mobile devices, as a result of "intensifying macro issues, such as inflation."

Things aren't going to get better any time soon if a pair of recent TrendForce reports are to believed. The firm predicts enterprise demand for NAND and DRAM will fall 5-10 percent and 3-8 percent respectively over the next quarter.

The semiconductor shortage is anything but over

But while demand for chips used in memory, gaming, and PCs may be softening as customers grow more risk averse, other markets remain capacity challenged.

This week, Automotive News reported US automakers had cut production of more than 100,400 vehicles this week alone as a result of ongoing challenges sourcing semiconductors.

The report found that nearly three million vehicles have been cut from global production schedules in 2022, with projections pointing to a 3.8 million cut by the year's end.

Meanwhile, networking vendors, including Juniper and Arista, which rely on specialized switch ASICs, have seen lead times for critical components slip to more than a year.

However, changes in demand may offer some hope. Specialized chipmakers have an advantage that many commodity chipmakers don't: they can shift around their product mix, CCS Insight's Lam explained. For example, they can prioritize premium chips with higher profit margins. At the same time foundry operators can rebalance their fab capacity to keep up with what customers want.

"The semiconductor supply chain is still digging itself out of the post-pandemic correction. Basically, it shut off production early and was slow to restart," Lam said. "It is in the manufacturer's best interest not to over-react to changes to the market demand." ®

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