Chip glut expected to persist as global demand slows

Thursday 18 Apr 2024

This article first appeared in The Edge Malaysia Weekly on October 24, 2022 - October 30, 2022

INFLATIONARY pressures and a slowdown in consumer demand for electronic devices have triggered fears of a downward cycle for the semiconductor sector.

Adding to these woes is the stand-off between the US and China — the world’s two largest economies — with the Biden administration barring firms using American technology from selling certain chips that are used for supercomputing and artificial intelligence to Chinese companies. The move, which was unveiled on Oct 7, is seen as an attempt to slow Beijing’s technological and military advances.

These headwinds are expected to dampen prospects for some semiconductor players, including US-based memory chip makers Micron Technology Inc, Intel Corp Inc, Nvidia Corp, which have warned of deteriorating demand going forward — raising fears of a chip oversupply.

However, in stark contrast to the pessimistic view, chipmaker Broadcom Inc sees strong sales for the fourth quarter of this year.

Nonetheless, according to Chen Shu-Chu, deputy director-general of the Hsinchu Science Park Bureau in Taiwan, the oversupply situation is likely to persist.

Hsinchu Science Park, located near Taipei in northern Taiwan, is home to semiconductor companies like Taiwan Semiconductor Manufacturing Co Ltd (TSMC), the largest contract chip manufacturer in the world. Its clients include Apple, Intel, Qualcomm, AMD and Nvidia.

Major semiconductor manufacturers like United Microelectronics Corp (UMC) and MediaTek Inc are also headquartered at Hsinchu Science Park.

TSMC has a market capitalisation of TWD10.31 trillion (RM1.52 trillion). The behemoth is worth almost as much as all the companies on Bursa Malaysia, which had a total market capitalisation of RM1.63 trillion as at Oct 20.

UMC has a market value of TWD493.04 billion, while MediaTek is worth TWD911.61 billion.

During a media visit to Hsinchu Science Park last month, Chen told The Edge that the hoarding behaviour during the pandemic of clients from the consumer electronics and automotive industries, in a bid to secure enough silicon chips to meet consumer demand amid expectations of a chip shortage during the height of the pandemic, is partly to blame for the current glut.

Hence, the industry enjoyed run-up orders during the pandemic, boosting sales and stock prices.

Fast forward to today, Chen sees a reversal of fortune as the semiconductor sector is expected to grapple with weak demand spurred by decades-high inflation, rising interest rates and geopolitical tensions.

Against this backdrop, Chen observed that the glut situation could stretch well into the first half of next year, and added that the normalisation of equilibrium conditions is likely to occur after a year — due to chip makers continuing with their capacity expansion executed since last year when the industry faced a semiconductor chip crunch and supply chain disruptions caused by Covid-19 lockdowns and the ongoing Russian invasion of Ukraine.

It is understood that Taiwan makes 65% of the world’s semiconductor chips that are used in everything from smartphones to missiles. It also accounts for more than 90% of global output of the most advanced chips, such as nodes below 10 nanometres (nm), which are predominantly produced by TSMC.

The smaller the chips, the better because the smaller the size of a single transistor, the more tightly they can be packed together. And the more transistors there are, the more calculations the chip can perform, making it an even more powerful chip.

Global chip winter

In July, US-based technology research and consulting firm Gartner Inc lowered its global semiconductor revenue growth forecast for 2022 to 7.4%, to US$639.22 billion, compared with its previous forecast of a 13.6% increase (to US$676 billion), citing worsening economic conditions. For 2023, it estimated that semiconductor revenue would decline 2.5% to US$623.09 billion.

“We are already seeing weakness in semiconductor end markets, especially those exposed to consumer spending. Rising inflation, taxes and interest rates, together with higher energy and fuel costs, are putting pressure on consumer disposable income. This is affecting spending on electronic products such as PCs and smartphones,” says Richard Gordon, practice vice-president at Gartner.

In contrast, global semiconductor revenue grew 26.3% to US$595 billion in 2021.

When announcing its quarterly results last month, Micron Technology warned of even tougher times ahead and said it was slashing capital expenditure (capex) by 30% year on year (y-o-y) to US$8 billion in the face of a weakening memory chip market.

TSMC followed suit, announcing during its investor conference on Oct 13 that it would cut its annual capex by 10% to US$36 billion for 2022, from an earlier estimate of US$40 billion to US$44 billion. Its CEO Wei C C warned of a downturn in the semiconductor industry next year. “We expect probably in 2023 the semiconductor industry will likely decline. TSMC is also not immune.”

In response to declining demand and slowing PC sales, Intel is reportedly planning for layoffs this year to stem losses. The company posted a net loss of US$500 million in the second quarter of this year.

The US’ move to curb tech exports to China is another factor that has weighed on the industry. TSMC chairman Mark Liu said on Oct 19 at the Taiwan Semiconductor Industry Association’s annual convention, “The US-China trade conflict and the escalation of cross-strait tensions have brought more serious challenges to all industries, including the semiconductor industry.”

The latest policy weighed on semiconductor stocks. It was reported that TSMC’s share price fell by the most in 28 years following the US restrictions on chip exports to China. TSMC’s shares tanked 8.3%, or TWD36.5, to TWD401.5 on Oct 11.

TSMC shares dived further to about a 26-month low of TWD395 on Oct 13. The stock tumbled 36% year to date (YTD), or TWD223.42, to TWD397.5 on Oct 20 from TWD620.92 on Jan 3. The shares have fallen 16.6% in the past month alone (from TWD476.5 on Sept 20).

Similarly, the Taiwan Capitalisation Weighted Stock Index faced heavy selling pressure — after it hit a near two-year bottom of 12,810.73 points on Oct 13) — as it shrank 29.14% YTD, or 5,324.41 points, to close at 12,946.10 on Oct 20.

Nevertheless, it was reported that TSMC and Samsung have been given a one-year exemption from the US restrictions on the sale of advanced chips and technology to China.

According to The Financial Times, TSMC’s Wei confirmed that the company had been given a one-year licence for its Nanjing manufacturing facility in China. The licence allows the company to continue ordering American chipmaking equipment for its expansion in China.

Apart from its headquarters and base in Hsinchu Science Park in northern Taiwan, TSMC also has operations in the southern and central parts of the island. Outside Taiwan, it has manufacturing facilities in China and the US.

Established in 1987, TSMC had a combined manufacturing capacity exceeding 13 million 12in equivalent wafers in 2021. These facilities include four 12in wafer fabs, four 8in wafer fabs and a 6in wafer fab — all in Taiwan — as well as a 12in wafer fab at a wholly-owned subsidiary, TSMC Nanjing Company Ltd, and two 8in wafer fabs at wholly-owned subsidiaries US-based WaferTech and TSMC China Company Ltd.

TSMC plans to build new manufacturing facilities in the US and Japan in an effort to reduce geopolitical risk amid growing tensions between Taiwan and China.

China accounted for 10% of TSMC’s revenue in 2021, down from 17% in 2020. TSMC has a 12in wafer fab in Nanjing, which manufactures 16nm and 28nm chips.

Taiwan hopes for peaceful relationship with China

Taiwan’s outsized role in chipmaking has come under the spotlight and put it at the forefront of rising hostilities between the US and China.

Tensions in the Taiwan Strait escalated to an alarming level, with China carrying out military drills regularly after Nancy Pelosi, the US House of Representatives speaker, visited in August. Bloomberg reported that, since then, an average of 10 Chinese military aircraft per day have flown across the median line dividing the Taiwan Strait or “into the southwestern corner of the island’s larger air-defence identification zone”.

While Taiwan’s dominance in the semiconductor space has grown over the years, worries about China invading the island — which Beijing sees as a territory that will eventually be unified with the mainland — are also growing as the relationship between the world’s two largest economies deteriorate.

This has led to louder voices, especially from the West, calling for the heavy dependence on Taiwan’s chipmaking capabilities to be reduced.

In response to the increasing threat from China, Chen Shu-Chu, deputy director-general of the Hsinchu Science Park Bureau in Taiwan, said: “[For the] people in Taiwan, we hope we have a very peaceful and stable Taiwan Strait, so the companies [in the semiconductor industry] can focus on [developing and advancing] their core technology. We are ordinary people; we cannot handle international political issues.”

Chen stressed that in an ideal world, the chip industry should avoid engaging in politics. “Politics is politics, business is business; both are separated,” she said.

On concerns over the overconcentration of the semiconductor chipmaking capabilities in Taiwan, which makes the industry vulnerable to issues such as geopolitical disputes, Chen emphasised the importance of ensuring the stability of the entire value chain, as no one company can execute end-to-end services across the entire spectrum.

“The semiconductor industry is an ecosystem; not a single company can do this alone with cost efficiency and [in] an effective manner. I think in Taiwan, we have an advantage in manufacturing [capabilities] and we will just focus on this.

“Look at ecosystems; [for upstream,] semiconductor integrated circuit (IC) design is a US speciality, while [for downstream] packaging and testing, some countries may have expertise on this; Taiwan cannot do everything. It is about collaboration,” she explained.

Speaking about how Taiwan Semiconductor Manufacturing Co Ltd (TSMC) grew into the world’s largest semiconductor foundry, Chen attributed this to two factors. First, it is the “endurance” of the group’s employees who are hardworking and disciplined. Second, the group has been receiving the full support of the Taiwanese government over the years, solidifying its position as the world’s largest chip maker.

“That is why TSMC wants to have its factory stay inside the Hsinchu Science Park, because the government — we — will give them full support and provide them with reliable water and electricity supply, and local talent to fuel its growth,” Chen said.

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