Computer chips face moment of toilet paper hoarding as scarcity turns to glut


OAKLAND, Calif., July 12 (Reuters) – A supply chain crisis triggered by the global pandemic has deprived makers of PCs and smartphones to cars of the computer chips needed to make their products.

All of that suddenly changed in three weeks, from late May to June, as high inflation, China’s latest COVID lockdown, and war in Ukraine dampened consumer spending, especially on PCs and smartphones.

Chip shortages have turned into a glut in some sectors, taking Wall Street by surprise. At the end of June, memory chip company Micron Technology Inc (MU.O) announced that it would cut production. The market reversal caught Micron off guard, admitted chief commercial officer Sumit Sadana. Read more

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As U.S. chip earnings reporting season kicks off later this month, TechInsights chip economist Dan Hutcheson has warned of more bad news following the gloomy forecast. of Micron. “Micron kind of plowed the ground, with their honesty,” he said.

Concerns about an industry slowdown have sent chip stocks tumbling, with the Philadelphia Semiconductor Index (.SOX) falling 35% so far in 2022, far more than the S&P 500’s 19% loss ( .SPX).

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Hoarding makes the situation worse. Like nervous shoppers looting supermarket aisles for toilet paper before a COVID-19 lockdown, manufacturers have stockpiled computer chips during the pandemic. Prior to this, “just-in-time” manufacturing was the norm for tax-prudent companies, which ordered parts as close to production time as possible to avoid excess inventory, reduce warehouse capacity, and reduce up-front expenses. .

During the pandemic that has shifted to what some jokingly call a “just in case” practice of stockpiling chips. “Hoarding is a sign that they think it’s essential until one day they look at it and say, ‘Why do I have all this inventory? “,” said Hutcheson, who has forecast chip supply and demand for more than 40 years. “It’s kind of like toilet paper.” Experts say the big-chip U-turn has hit unevenly across industries. Big chip suppliers to consumer electronics makers, especially low-end smartphones, will be hardest hit by the slowdown, said Tristan Gerra, Baird’s senior semiconductor analyst. Nvidia Corp (NVDA.O), the design giant whose graphics chips are used for gaming and cryptocurrency mining, could see “another shoe drop” as prices continue to slide, exacerbated by the recent cryptocurrency market crash, Gerra said. Among those less affected by a glut are suppliers to Apple Inc, such as the world’s top chip factory, Taiwan Semiconductor Manufacturing Co , Wedbush analyst Matt Bryson said. Demand remains high for Apple devices, which are more premium. Chipmakers supplying automotive and data centers will also thrive, Gerra said, noting relentless demand. “In power management, we’re going to do some gangbusters,” said an executive at another global chipmaker who asked not to be identified.

However, for radio frequency chips used in smartphones, “we are seeing a pullback because of handsets,” he added.

The executive’s chip factory is “re-engineering” production lines to make more power management chips for cars and fewer RF chips, which could eventually help alleviate some of the automotive chip shortages, did he declare.

While industry executives and analysts can’t say how many excess chips sit in warehouses around the world, first-quarter inventories hit an all-time high at major electronics manufacturing services companies, Jefferies analyst Mark Lipacis said in a July 1 note. The previous first-quarter record was over two decades ago, just before the bursting of the dot-com bubble.

Manufacturers may decide to use the chips in warehouses instead of buying new ones and canceling orders, Lipacis warned.

Auto chipmakers are safe for now, some analysts said. But that may not last long.

In his September note, Bernstein analyst Stacy Rasgon said automakers were ordering far more chips than they seemed to need, and that trend is continuing, he told Reuters. .

This will create a problem when automakers stop buying chips to run out of inventory.

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Reporting by Jane Lanhee Lee, additional reporting by Noel Randewich in Oakland, California, Chavi Mehta in Bangalore and Joyce Lee in Seoul; Editing by Kenneth Li and Richard Chang

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