Chipmakers Hint at Ease of Chip Supply Glut but Demand Recovery Still Slow


Global chipmakers are expressing relief over the gradual easing of the semiconductor supply glut, a development expected to bring some respite to the industry. However, the outlook for chip demand from customers beyond the artificial intelligence (AI) sector remains subdued. Throughout this year, major markets for chips, including smartphones, PCs, and data centers, have experienced significant contractions due to weak global economic conditions, high inflation, and rising interest rates. The result has been an unprecedented oversupply of commodity chips, contributing to a combined first-half operating loss of KRW 15.2 trillion (approximately Rs. 98,650 crore) for the world’s two largest memory chip manufacturers, Samsung and SK Hynix.

The supply glut is gradually starting to ease, primarily due to production cuts. In the June quarter, the decline in PC shipments moderated to 11 percent, a notable improvement compared to the 30 percent slump witnessed in each of the previous two quarters, according to data from tech analysts Canalys. Similarly, the smartphone market is showing signs of improvement, with cellphone shipments declining by 8 percent in the June quarter compared to a 14 percent drop in the first quarter, as reported by research firm Counterpoint.

Despite these positive indicators, chip demand recovery remains sluggish. Woohyun Kim, the chief financial officer at SK Hynix, acknowledged the gradual recovery in demand but cautioned that it was proceeding slowly. He attributed the recent improvement in PC shipments to promotions and low-end models, which have had limited impact on chip demand recovery. Additionally, shipment forecasts for PCs and smartphones have been downgraded from earlier predictions.

Although demand for chips to support generative AI has seen significant growth since the launch of OpenAI’s ChatGPT, it still represents a small fraction of overall chip demand. This is impacting corporate spending on servers, as some companies prioritize investments in AI technologies. Intel CEO Pat Gelsinger revealed that the inventory glut in server central processing units (CPUs) would persist until the second half of the year. Data center chip sales are expected to decline modestly in the third quarter before recovering in the fourth quarter. Intel shares surged by 6.4 percent after reporting stronger-than-expected results.

The slow recovery in China, the world’s largest chip buyer, is also dampening the overall outlook for the chip market. Both Samsung and SK Hynix reported that China’s reopening did not meet expectations of reviving the smartphone market. Consequently, production cuts of NAND memory chips, widely used in smartphones for data storage, are being extended.

Analog chipmaker Texas Instruments, with significant exposure to China, issued a forecast for the third-quarter revenue and profit below Wall Street targets, citing sluggish recovery in end-market demand that led to order cancellations by clients.

On the other hand, manufacturers of equipment used to make chips, such as KLA Corp and Lam Research, are experiencing early benefits from the AI boom. Both companies forecast quarterly revenue above Wall Street estimates. This growth is attributed to the increasing production of high-end chips used to support AI-related applications.

SK Hynix reported that demand for AI server memory more than doubled in the second quarter compared to the first, signaling the growing significance of AI in the chip industry. Additionally, its DRAM chips, responsible for holding information from applications during system use, sold at higher prices in the second quarter, further contributing to the company’s performance.

While the easing supply glut brings a sense of optimism to chipmakers, the industry remains cautious about demand recovery, especially in markets beyond the AI sector. The chip industry’s future trajectory will largely depend on economic conditions, technological advancements, and the adoption of AI technologies in various sectors worldwide.

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