Semiconductor Demand Slides for the Second Consecutive Month in 2022
The slump in the demand for semiconductors is due to soaring cost pressure from interest rate hikes by the Fed to keep rising inflation in check.
The demand for semiconductors from electronics, automotive and other sectors slumped for a second consecutive month in August as a result of soaring cost pressure from interest rate hikes by the Fed to keep rising inflation in check.
The prevalence of semiconductors across computers and other gadgets, vehicles, home appliances, and almost every sphere of life would have one believe that the demand for those small chips would be perennial and the industry to be impervious to a major correction. This certainly held for over a decade.
The latest data indicates that the semiconductor industry is witnessing a downturn, thanks to shrinking demand in July and August 2022. Citigroup analyst Christopher Danely told Bloomberg, “We remain cautious on semis and believe this downturn is similar to the 2011/2012 downturn, due to multiple contraction, demand contraction and inventory correction.”
Massive supply chain issues hit semiconductor inventory as the COVID-19 pandemic tightened its disruptive grip on global commerce. Semiconductor companies announced large-scale investments to mitigate the high demand from increased consumption amid the pandemic.
However, the process-intensive nature of semiconductor fabrication meant that it would take years before this investment materialized into production. This effectively rules out the increase in production capacity as something that could eclipse the demand.
Instead, the gradual decline in demand for semiconductors is a direct consequence of cost pressure owing to hikes in interest rates to counter inflation and thus declining purchasing power.
According to data by S&P Global, sectors such as technology equipment, automobiles & auto parts, and electronics had lower demand for semiconductors in July. This continued into August.
“Sales trends in each industry have undergone a significant slowdown from recent peaks in the middle of last year as the global economy rotated demand into goods, with high price levels and slowing global growth set to accelerate this trend further,” noted IHS Markit, an information services provider that merged with S&P Global in this year.
Falling Semiconductor Demand in 2022 | Source: S&P Global
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Banking and financial services company ING discovered that smart devices, one of the major exports of Taiwan, the biggest semiconductor supplier, grew 2% year-over-year (YoY) compared to 14.6% in July. Additionally, the export of information, communication and audio-video products contracted by 1.6% YoY.
Meanwhile, exports from China, which produces Taiwanese products, fell sharply to 7.1% YoY in August from July’s 18.0% YoY.
“As high inflation continues to lower purchasing power in the export destination of the US and Europe, and with Mainland China suffering from weak consumer demand from the real estate crisis, we cannot rule out that the bad time for semiconductors and therefore trade for Taiwan and Mainland China is going to get worse for the remainder of 2022,” ING noted.
Bloomberg Intelligence assessed that net earnings for chip-related companies in the S&P 500 are expected to be consistently low through 2023.
“Subsequently, the outlook for the semiconductor sector appears bleak,” IHS Markit noted. “The Philadelphia semiconductor index, covering the 30 largest US companies involved in the production and sale of semiconductor products, has declined sharply in the year-to-date in line with the trend in our Global Electronics New Orders Index, while demand concerns are also weighing on wider tech stocks.”
Semiconductor Equity Benchmark vs. Global Electronics Orders | Source: S&P Global
Q2 2022 proved a weak quarter for American chipmaker Intel, whose revenue slipped by 22% YoY. NVIDIA and AMD revenue remained in green for Q2 2022 (up 3% and 70%, respectively), though the profits of Intel, NVIDIA, and AMD declined by 109%, 72%, and 37%, respectively.
Year-to-date, shares of Intel are down 40.88%, NVIDIA by 52.24%, and AMD by 43.12%.
Though not American companies, Samsung and TSMC revenues were buoyed in Q2 2022 because of the contract manufacturing business from NVIDIA, AMD, Qualcomm, MediaTek, Apple, etc., for the latter. There are concerns that these companies could trim down orders in upcoming months.
On the other hand, Samsung’s revenue was supported by solid server demand and the fact that it uses the chips it manufactures in its electronics products. However, Samsung warned that the demand for consumer products like PC and mobile would likely stay weak.
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