Chip delivery times fall, but so does demand as global economic conditions worsen

Analyst believes industry is in for 'deepest downcycle and inventory correction in over a decade'

Chip delivery times shrank in August but while some are painting this as a sign that semiconductor shortages are easing, it is most likely an indicator that demand is slowing as economic conditions worsen.

Semiconductor lead times averaged 26.8 weeks during August, Bloomberg said, quoting a report from trading and technology financial outfit Susquehanna International.

This is actually just a single day shorter than lead times were in the preceding month, which will not come as much relief to beleaguered manufacturers struggling to deliver their own products that contain chips.

What this actually points to is slowing demand for some technology products, such as smartphones and PCs, Susquehanna analyst Chris Rolland admitted, as consumers rein in spending in the face of growing inflation and rampant energy prices.

But the semiconductor industry is now facing high inventory levels due to a combination of the disruptions to supplies caused by the pandemic and its lockdowns, and customers over-ordering with multiple suppliers in an attempt to secure deliveries of components.

Last month, a report from Jefferies Research indicated that semiconductor inventory levels in Europe had risen sharply in Q2 2022, in many cases to new historical highs, while demand was weakening and sharp cuts in orders were being reported by some digital logic and memory suppliers.

Jefferies warned that an inventory correction is now starting, and will likely last through the entire first half of 2023: "We believe the semiconductor industry is heading into the deepest downcycle and inventory correction in over a decade."

The company noted that digital logic and memory chip suppliers such as Intel, Western Digital, Nvidia, and Micron have already begun to lower their earnings guidance sharply, and predicted that the semiconductor market will bottom out at around a 20 percent year-on-year decline by mid-2023.

Not all types of semiconductor are equally affected, however. Susquehanna's Rolland said that power management, microcontroller, and optoelectronic devices still had extended lead times, with makers such as Microchip Technology and Infineon struggling to keep up with demand.

One of the reasons for this has been the lack of investment in the mature process technologies typically used to manufacture such components, IDC said earlier this year, for which there is no quick fix as it takes years to bring online new capacity.

Jefferies noted that the analog/power/MCU segment had so far been "resilient," but warned it was also expecting to see an inventory correction in the automobile and consumer markets that would affect manufacturers of these chips as well in coming quarters. ®

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