SAN FRANCISCO: A few months ago, makers of computer chips seemed on top of the world.
Customers could not get enough of the small slices of silicon, which act as the brains of computers and are needed in just about every device with an on-off switch. Demand was so strong — and U.S. dependence on a foreign manufacturer so worrying — that Democrats and Republicans agreed in July on a $52 billion subsidy package that included grants to build new chip factories in America.
U.S. chipmakers such as Intel, Micron Technology, Texas Instruments and GlobalFoundries pledged huge expansions in domestic manufacturing, betting on a growing need for their products and the prospects of federal subsidies.
But lately, supplies of some semiconductors are piling up, which could spell good news for consumers, but not for industry executives. Their bold investment plans are running into a sudden and unexpected slowdown in consumer demand for electronic gadgets, new U.S. restrictions on sales to customers in China, rising inflation and the unusual prospect of a simultaneous shortage of some chips and glut of others.
That has left chipmakers, which had been looking ahead to immense demand and opportunity, suddenly grappling with immense challenges. Many of the companies now face complex questions about whether and when to boost production, amid uncertainty about how long the current sales slowdown may last.
“Six months ago, I would have said we were in this hypergrowth phase,” said Rene Haas, CEO of Arm, the British company whose chip technology powers billions of smartphones. Now, he said, “we’re in a pause.”
For many consumers, products that were scarce because of a chips shortage may start becoming more available, though not immediately. Automakers, which have struggled to make enough cars with the lack of chips and other components, said they were getting more but still face some problems. Prices of smartphones and computers could also fall as chip supplies grow and prices plummet for two types of memory chips they use.
But for now, not everyone is able to get all the chips they need, and prices remain high for many kinds of semiconductors. “We are still way above pre-pandemic pricing,” said Frank Cavallaro, CEO of A2 Global Electronics and Solutions, a chip distributor.
Fears of a slump, which have clobbered semiconductor stocks this year, are evident in recent earnings announcements from chipmakers. South Korea’s SK Hynix on Wednesday reported a 20% drop in revenue and said its business of memory chips “is facing an unprecedented deterioration in market conditions.” Intel provided more evidence of a downturn in its third-quarter results Thursday, including a 20% drop in revenue and a $664 million charge to cover cost-cutting measures expected to include job cuts.
The Biden administration delivered its own blow this month with a sweeping set of restrictions aimed at hobbling China from using U.S. technology related to chips. The measures restrict sales of some advanced chips to Chinese customers and prevent U.S. companies from helping China develop some kinds of chips.
That hurts semiconductor companies like Nvidia, which makes graphics chips that are used to run AI applications in China and elsewhere. The Silicon Valley company, already suffering from a sharp sales decline for video game applications, recently estimated that the U.S. restrictions would probably reduce revenues in its current quarter by about $400 million.
The sanctions may bite even harder at companies that sell chipmaking equipment, which relied heavily in recent years on sales to Chinese factories.
Lam Research, which produces tools that etch silicon wafers to make chips, estimated that the China limitations would reduce its 2023 revenue by $2 billion to $2.5 billion. “We lost some very profitable customers in the China region, and that’s going to persist,” Doug Bettinger, Lam’s chief financial officer, said during an earnings call last week.
Applied Materials, the biggest maker of chip manufacturing tools, also said sales would suffer because of the restrictions. On Wednesday, another maker of chip manufacturing tools, KLA, said its revenue next year was likely to shrink by $600 million to $900 million as it reduces equipment sales and services to some customers in China.
Worries about foreign competition are nothing new in semiconductors, an industry known for boom-and-bust cycles. But it has rarely faced a player as potent as the Taiwan Semiconductor Manufacturing Co., whose factories on the island churn out chips designed by companies including Apple, Amazon, Nvidia and Qualcomm.
China claims Taiwan as its own territory, creating a potential risk to chip supplies. That helped drive the recent bipartisan support for the U.S. chip legislation, which was heavily pushed by President Joe Biden.
He trekked to Ohio last month for the groundbreaking of a $20 billion Intel manufacturing campus. On Thursday, he visited a site near Syracuse, New York, where Micron has vowed to spend as much as $100 billion over 20 years on a large complex to build memory chips, a project he called “one of the most significant investments in American history.”
Those plants will be needed at some point, industry executives said. But they are now grappling with the sudden and sharp decline in chip demand.
The problem is particularly acute in processors and memory chips, which perform calculations and store data in personal computers, tablets, smartphones and other devices.
Those products were hot commodities as consumers worked from home during the coronavirus pandemic. But that boom has now cooled, with PC sales dropping 15% in the third quarter, according to estimates by International Data Corp. The research firm also predicted that smartphone sales would fall 6.5% this year. Demand has been tempered by inflation as well as a lengthy COVID lockdown in China, analysts said.
At the same time, inventories of chips piled up. Computer makers spooked by the shortage bought more components than they ended up needing, said Dan Hutcheson, a market researcher at the firm TechInsights. When customer demand dried up, they started slashing orders.
“You see multiple issues converging,” said Syed Alam, who leads Accenture’s global high-tech consulting practice, including semiconductors.
Handel Jones, CEO at International Business Strategies, predicts that total sales for the chip industry will still grow 9.5% this year. But he expects revenue to decline 3.4% to $584.5 billion next year. Last year, he had predicted steady yearly growth for the chip industry from 2022 until 2030.
Warning signs included Intel’s second-quarter results, which it announced in July. The company posted a rare loss and a 22% drop in revenue, blaming its own missteps and customers who cut chip inventories.
At Micron, the mood also changed quickly. In May, the company gave bullish presentations at an investor event in San Francisco about long-term demand for its memory chips. By the next month, it was warning of slowing demand and falling chip prices.
In September, the company reported a 20% drop in fourth-quarter revenue. It also slashed planned spending on factories and equipment by nearly 50% in the current fiscal year.