The semiconductor shortage seems to be over: why isn't this necessarily good news

The semiconductor shortage seems to be over: why isn’t this necessarily good news

Is the semiconductor shortage that has crippled many industries since the pandemic finally on the way to improving? In any case, there are several signs that allow us to believe this. One by one, chip makers say they are seeing slowing demand, and say they plan to adjust their investments accordingly.

Nvidia and Intel … chip founders on alert

In June, Micron Technology, a US memory chip maker, cut its third-quarter sales forecast by 20% to $7.2 billion.

At Intel, Chief Financial Officer David Zinsner announced that the outlook for the second half has deteriorated and that the company will adjust its spending and investments according to this new situation.

Same story with Nvidia, which has seen its share price drop 48% since the beginning of the year and announced that it will slow hiring after noticing slowing demand in two of its strategic markets, cryptocurrency mining and video games.

Why is the demand for semiconductors declining

The reason for the shortage of chips is the imbalance between supply and demand. Supply constraints have not changed, but demand is definitely slowing. In fact, the increase in PC sales observed since the pandemic is coming to an end, directly affecting Intel and AMD. At the same time, investments in bitcoin mining have fallen: Nvidia has been hit hard. Finally, the demand for memory chips is also declining, which has consequences for a company like Samsung. Summarizes David Yoffe, a professor at Harvard Business School who previously served on the Intel board of directors.

Faced with a limited range of activities, increased reliance on their electronic devices for leisure and work, and with surplus money to spend, many individuals have already taken advantage of the pandemic to refurbish their smartphones, computers and other technological gadgets, driving up demand in these two industries. .

But with the situation returning to normal, and the return of inflation prompting many consumers to cut back on their spending, we are seeing the end of this increase, relieving pressure on the supply of chips.

Computer and mobile phone sales decline, cryptocurrency declines

IDC expects worldwide PC sales to fall by 8% this year, while Gartner expects smartphone sales to fall by more than 7%. Computers and smartphones account for 30% and 20% of global demand for chips, respectively, and the desire to use these devices may decline further if the global economy enters a recession.

The cryptocurrency market is going through tough times. In May, Luna/UST, one of the most popular dollar-backed stablecoins on the market, crashed dramatically, costing investors tens of billions of dollars. The price of Bitcoin is down 60% compared to its historical peak last November. Mining directly affects the demand for chips: in 2021, one in five microprocessors (GPUs) sold were used to mine the Ethereum blockchain.

Finally, US sanctions aimed at limiting China’s access to more advanced chips are causing a drop in demand, given that the Middle Kingdom is the world’s largest market for semiconductors. Sanctions imposed under the Trump administration and maintained by the Biden administration have limited the ability of Chinese companies to purchase chips that contain US technology.

The United States is also pressing foreign companies, such as Dutch ASML and Taiwan’s TSMC, the world’s number one chip maker, to stop selling to Chinese companies. The US Commerce Department is also seeking to extend the Trump administration’s restrictive measures.

towards cheaper chips?

As a result of this drop in demand, the prices of semiconductors have finally begun to fall. Market intelligence firm TrendForce expects a 10% drop in the price of memory chips in the third quarter, while Samsung has announced that it plans to cut the price of this type of chips for the second half of 2022.

According to some estimates, the price of graphics chips has already fallen by 57% since January. However, that drop has to qualify, as far as not all types of chips are concerned, according to Mike Daimler, an independent analyst who specializes in the semiconductor industry.

It all depends on what kind of memory chips we are talking about. Older technologies always come down in price eventually, but I don’t expect the latest generations, like GDDR6 and DDR5 chips, to go down in price. We also expect an increase in the price of Intel processors. »

Despite Republicans, the 52 billion chip bill is still relevant

While good news for industries facing chip shortages and consumers, could this development jeopardize the chip law? The Biden administration is currently trying to pass this law in order to support an increase in semiconductor production on American soil: from 37% market share in 1990, this has actually fallen today to 12%.

However, the chip bill is met with reluctance on the part of Republicans, who, while tempted by the desire to restore American sovereignty over the chips and confront China, are reluctant to spend more public money … and grant legislative successes to the Democratic administration a few months before the Midterm elections.

So this investment plan frees up at least $52 billion in subsidies to industry and scholarships for research and development over five years, plus a 25% tax credit for companies that will build plants in the United States.

Evidence that the desire to impede China’s rise on chips remains, this law should also exclude from obtaining support any company intending to use it to increase its production capacity in China.

The bill came to fruition this week, despite the beginnings of rebalancing seen in the market. Senate Majority Leader Chuck Schumer put the bill to an initial vote on Tuesday, winning 64 to 34, paving the way for the final vote in the Senate and House of Representatives to pass the bill. This vote could be held before the end of next week.

Industrial transportation continues around the world

According to Mike Daimler, it is also unlikely that companies that have decided to increase their production capacities in the United States and Europe will review their version.

TSMC is investing in Arizona, Samsung is building a new plant in Texas, and Globalfoundries and STMicroelectronics are doing the same in Croles, France… In the event of a delay, I don’t expect these companies to reconsider their growth plans. »

This is for many reasons. On the other hand, chip shortage is not a uniform phenomenon, but a complex and multifaceted crisis, covering many different facts. Thus, the chips used in the automobile industry, for example, are not the same as those used in high-end electronics, and the blockage is due to various reasons. However, while the situation is improving in some sectors, it remains difficult in others.

Thus, the demand for chips that equip data centers remains strong, as is the demand for automotive chips. And converting the industry to the electric vehicle, which requires more chips than its thermal counterpart, means it’s not about to weaken.

Overdependence on China and Taiwan (threatened by China)

On the other hand, the construction of new factories in the United States and Europe is not actually driven by the current shortage, as it will take years anyway before these new factories start production, but rather the concern of the excessive concentration of industry in Southeast Asia, in particular In Taiwan, under constant threat from the Chinese invasion.

Based on the experience accumulated over the past two years, everyone in the industry is concerned about the over-reliance on TSMC, the concentration of production capacity in Taiwan and the over-reliance on the globalized value chains of Chinese producers. Therefore, efforts to reduce the industry’s dependence on China and Taiwan will continue. David Yoffe concludes.