Global Chipmakers Find Glimmer of Hope as Supply Glut Eases, But Non-AI Demand Remains Uncertain
Chipmakers around the world are breathing a sigh of relief as they see signs of an end to the semiconductor supply glut, although concerns linger over demand from customers outside the artificial intelligence (AI) industry. The major markets for chips, including smartphones, PCs, and data centers, have all experienced declines this year as a result of reduced spending by both corporate customers and consumers amidst a weak global economy, high inflation, and rising interest rates.
The oversupply of commodity chips had led to a staggering loss of 15.2 trillion won ($18 billion) in operating profit for Samsung and SK Hynix, the world’s two largest memory chipmakers, in the first half of the year. However, recent production cuts and a smaller decline in PC shipments have contributed to a gradual easing of the glut. Data from tech analysts Canalys showed that PC shipments fell by 11 percent in the June quarter, compared to a steep 30 percent decline in each of the previous two quarters. In the smartphone market, there has also been improvement, with cellphone shipments dropping by 8 percent in the June quarter, compared to 14 percent in the first quarter, according to research firm Counterpoint.
Demand is recovering very gradually, said Woohyun Kim, CFO at SK Hynix, during an earnings call. However, he noted that the recovery is mainly driven by promotions and low-end models, which means the impact on chip demand is limited. As a result, shipment forecasts for PCs and smartphones for this year have been downgraded from earlier predictions.
While the demand for chips to support generative AI has seen a rapid increase since OpenAI’s ChatGPT was launched last year, this sector represents only a small fraction of the overall chip demand. As companies prioritize investment in AI, corporate spending on servers has been curtailed, affecting chip demand for other purposes. Intel CEO Pat Gelsinger recently stated that an inventory glut in server CPUs will persist until the second half of the year, with data center chip sales expected to decline in the third quarter before recovering in the fourth quarter.
The slow recovery in China, the largest chip buyer in the world, is also dampening the overall outlook. China’s reopening has failed to live up to expectations of reviving the smartphone market, leading Samsung and SK Hynix to extend production cuts of NAND memory chips used in smartphones for data storage. Analog chipmaker Texas Instruments, which has significant exposure to China, has forecasted lower-than-expected revenue and profit for the third quarter due to sluggish demand in end markets and order cancellations from clients.
However, the AI boom has brought early success to manufacturers of chip equipment such as KLA and Lam Research. Both companies have reported higher-than-expected quarterly revenue and their shares have seen an uptick. CEO Tim Archer of Lam Research noted that advanced AI servers require more leading-edge logic, memory, and storage content compared to traditional servers, and each incremental penetration of AI servers and data centers is expected to drive billions of dollars in additional chip equipment investments.
Chipmakers are also 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 previous quarter. The company’s DRAM chips, which hold information while the system is in use, sold for higher prices in the second quarter on average. SK Hynix leads the market in high bandwidth memory (HBM) DRAM used in generative AI, with a market share of 50 percent in 2022, followed by Samsung with 40 percent and Micron with 10 percent, according to TrendForce.
Despite signs of improvement, chipmakers remain cautious as uncertainties persist, particularly in non-AI sectors. The recovery in demand from customers outside the AI industry is still uncertain, given the sluggish global economy and geopolitical tensions. As chipmakers navigate these challenges, they continue to monitor market conditions and adjust their strategies accordingly.
In summary, while chipmakers are celebrating a reduction in the semiconductor supply glut, concerns over non-AI demand and economic uncertainties remain. The recovery in major chip markets is gradual, and chipmakers are adapting to changing conditions to ensure their businesses remain resilient. With the AI industry showing promising growth, manufacturers of chip equipment and high-end AI-supporting chips are reaping the benefits. However, the broader chip industry is cautiously moving forward as it awaits more concrete signals of recovery in demand outside the AI sector.
