Semiconductor Chip Shortage Turns into Chip Glut, Yet Chipmakers Continue with Expansion Plans

During the pandemic, the shift to digital, combined with logistical issues, caused a massive chip shortage. With strong demand and constraints on the supply side, the shortage pushed up the price of chips and, resultantly, all items that use semiconductors. 

During the shortage, semiconductor companies stepped on the gas and began heavy capital expenditures to produce more chips to meet demand. 

Capital expenditure for the global industry jumped from $ 113 billion in 2020 to $ 153 billion in 2021 – a jump of 35 per cent. Between 2021 and 2022, capex jumped another 18 per cent to $ 181 billion.

How Steeply Has Semiconductor Demand Declined?

With high inflation and high-interest rates, consumer discretionary spending has slowed down. Consumers are more likely to buy staples and basic services over upgrading their phones or laptops. As a result, some categories of chips, such as memory chips, have seen their prices decline rapidly. 

The decline in electronic demand is visible from the expected sales of Samsung Electronics. Analysts expect Samsung’s sales to drop by 12 per cent, a steep fall given the size and scale of the company’s large global operations. 

Out of the 18 largest Taiwanese technology hardware companies, 11 are expected to see a decline in sales in the calendar year 2023 – ranging from anywhere between 6 per cent to 45 per cent. 

South Korean chipmakers have been cutting production through 2022 to adjust for lower demand from end consumers. 

The cut in production during the first quarter of 2023 rivalled the cuts taken during the Great Financial Crisis – despite current production numbers being significantly higher. 

The cuts on a high base indicate a steep decline in demand for these chips. Inventory, too, is reportedly at a 26-year high relative to sales for Korean chipmakers. 

Analysts use inventory to sales ratio as a means to judge how easily a company can sell off finished goods. A much higher-than-normal ratio indicates that the companies might be having trouble selling off goods. 

Semiconductor Capex is Still Above Pre-Pandemic Levels

Despite the current circumstances, chipmakers have only shaved off a few billion dollars from their massive expansion programs. 

For instance, after spending $ 36.3 billion in capex, TSMC has cut its 2023 estimates to anywhere between $32 to $36 billion. Others, like Samsung, have said they have no plans to cut capital expenditure. So far, Samsung has only taken production cuts in its operations. 

The total expected capex is still 30-40 per cent above the capex that companies spent pre-pandemic level. The relatively positive outlook of chip players is due to their expectations that demand will revive in the second half of 2023. 

SK Hynix, a prominent player, which has cut its capex 50 per cent year-on-year, still expects higher capex compared to pre-pandemic 2019. It also expects demand to return by the end of 2023.

The Chip Shortage is Still On-going for Some Chips

Further, not all categories of chips have seen a similar decline in demand. For instance, TSMC managed to stand strong for a while when other semiconductor companies saw falling sales – due to its exposure to higher-end chips. 

Similarly, on the automotive side, automakers have only seen a slight easing in chip availability.

Automobile majors like Ford and Stellantis have already guided for a shortage of chips for their cars in 2023. Indian companies like Maruti Suzuki and Bajaj Auto have echoed similar sentiments, as well. Automakers find it difficult to substitute one chip for another due to high development costs and high costs associated with re-designing the entire system.

Ultimately, chipmakers’ optimism rests on demand returning within a short period of time. If demand does not return, these players could fall into a tough situation where they are expanding capacity at a time when demand doesn’t recover – leading to overcapacity. 

Yet, some analysts remain optimistic about recovery in the space as the world moves to digital platforms. Companies, too, appear to be playing the long-term game of investing for the future rather than being dictated by immediate profits.