The Chip Shortage is Easing—But Only For Some

Last week, South Korean chipmaker TSMC, which produces some of the world’s most advanced silicon , announced record profits for the past quarter—up by 76. 4 percent from the year before to 237. 03 billion New Taiwan dollars ($8.

05 billion). It also warned that weakening consumer demand coupled with chip hoarding would put a dent in future financials. “Our expectation is for the excessive inventory in the semiconductor supply chain to take a few quarters to rebalance to a healthier level,” C.

C. Wei, TSMC’s CEO, said during the company’s earnings call. It’s just the latest sign that the recent chipmaking boom is finally over—for some at least.

But that doesn’t mean the shortage of chips that has bedeviled the global economy is about to disappear, or that the US need no longer worry about shoring up its advanced chipmaking capacity. “In certain industries, there’s an easing—an equilibrium,” says Julie Gerdeman, CEO of Everstream Analytics, a company that analyzes supply chain data to help companies forecast risk. But she says the complexity of the chip supply chain, the diversity of components used in different sectors, and evolving risks affecting product availability, require a more nuanced picture.

Gerdeman says people often talk as if all chips are the same, “but you really need to look at the kind of chip and the industry. ” Some sectors still see shortages, as well as growing uncertainty around future supply, she adds. Many chip companies have made a killing in the past few years, thanks to the pandemic rush to buy laptops , games consoles , and other gadgets ; soaring use of cloud computing ; and increased need for chips in industries like automotive and home appliances.

The unprecedented demand, combined with supply chain shocks and pandemic shutdowns, has caused critical shortages of some chips, shuttering factories and forcing companies to redesign or reengineer products and hoard components. Now soaring inflation, growing economic uncertainty, crashing cryptocurrency prices , and a glut of some components have eased some shortages, and sky-high pricings for certain chips are coming down. Other manufacturers of high-end consumer chips also expect orders to start drying up.

Last month, Intel said it would put a freeze on hiring in the group that produces desktop and laptop chips, due to declining sales prospects . Reports published last week suggest the South Korean memory chipmaker Hylinx is considering whether to slash its 2023 capital expenditure by a third because of softening consumer demand. The price of some chips reflects the downward trajectory.

The cost of DRAM memory chips, for instance, fell by 10. 6 percent from April to July, according to TrendForce , a Taiwanese market research company. The cost of graphics processing units (GPUs), which are needed for gaming PCs, for crypto-currency computations, and to run artificial intelligence computations, has fallen roughly 17 percent over the past month, according to one analysis .

In April, Gartner forecast that semiconductor revenue growth would be roughly 13 percent in 2022, compared with 25 percent in 2021. But the turnaround is far from uniform. Everstream’s data shows that lead times for some advanced chips needed for medical devices, telecommunications, and cybersecurity systems is around 52 weeks, compared to a prior average of 27 weeks.

Automotive companies that were badly affected by the pandemic because they initially canceled orders for components were then blindsided by an uptick in demand and had no spare inventory and little negotiating leverage when it came to ramping back up. Modern cars can have thousands of chips, and future models are likely to pack even greater computing power, thanks to more advanced in-car software and autonomous driving functionality. “Anything automotive—or competing with capacity for automotive—is still highly constrained,” says Jeff Caldwell, director of global supply management at MasterWorks Electronics, a manufacturer of printed circuit boards, cables, and other electronics products.

Actify CEO Dave Opsahl, whose company sells operation management software to automotive companies, says the supply of chips has not improved for carmakers, and shortages of raw materials like resin and steel, as well as of labor, have also gotten worse. Frank Cavallaro is CEO of A2 Global, a company that finds, procures, and tests electronic components for manufacturers. He says the current situation reflects the complexity of the chip market and supply chain.

Many end products include numerous semiconductor components sourced from all over the world and require devices to be packaged by companies that are mostly in China. “It’s macro, it’s micro, it’s down to individual regions,” he says. Everstream’s Gerdman says the appearance of the new BA5 Covid variant in China has raised fears of draconian lockdowns that could hamper the production of chips and other products.

She adds that uncertainty around future capacity—as well as geopolitical restrictions on chip exports—makes it difficult to plan ahead. The geopolitical picture may significantly increase global capacity to produce advanced chips. Legislation making its way through the US Senate would provide $52 billion in subsidies to increase domestic chip production.

The US share of global chip production has fallen from 37 percent in the 1980s to 12 percent today. But while chip shortages have been cited by those boosting subsidies, much of the money would go to reshoring production of advanced chips. The country’s most advanced technology, from Intel, lags behind that of TSMC, presenting a potential weakness in US access to technology that promises to be vital for everything from AI to biotechnology to 5G.

The current downtown may only contribute to instability further along the semiconductor supply chain. “Unfortunately, a slowing economy brings with it the risk of some suppliers going into financial distress or liquidity crunch if they cannot access capital,” says Bindiya Vakil, CEO of Resilinc, a company that sells AI-based supply chain management tools. “This can introduce a lot of risk into the supply situation.

Companies should really monitor supplier financial health and collaborate closely with suppliers to give them favorable payment terms, upfront payments, and so on, to help them with liquidity. ” The cyclical nature of the semiconductor industry even has some, including Syed Alam, who leads the global semiconductor practice at consulting firm Accenture, envisioning the shortage turning into a glut. “A rising concern for 2023 is the possibility of overcapacity for chip production,” he says.

“Companies need to be focused on building an agile and resilient supply chain for the longer term, and be prepared to react. ”.