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Computer chips face toilet paper hoarding moment as shortage turns to glut

Micron Technology’s hard drive for data center customers was presented at a product launch event in San Francisco, October 24, 2019.

Stephen Nellis | Reuters

A supply chain crisis caused by the global pandemic has deprived makers of PCs and smartphones in cars of the computer chips needed to make their products.

All of a sudden that changed in the three weeks from late May to June, as high inflation, China’s latest Covid lockdown, and the Ukraine war slowed consumer spending, especially in PCs and smartphones.

Chip shortages have become a glut in some sectors, taking Wall Street by surprise. In late June, memory chip firm Micron Technology said it could reduce production. The market change has taken Micron unawares, Chief Business Officer Sumit Sadana admitted.

As the U.S. chip earnings reporting period begins later this month, TechInsights chip economist Dan Hutcheson has warned of a lot of bad news after Micron’s bad forecast. “The micron kind of plows the soil, with their fidelity,” he said.

Concerns about an industry downturn have hurt chip stocks, with the Philadelphia Semiconductor index falling 35% so far in 2022, more than a 19% loss in the S&P 500.

Hoarding makes it worse. Like nervous shoppers storming supermarket aisles for bathroom paper before a Covid-19 lock, manufacturers stocked up on computer chips during the pandemic. Prior to that, “at the right time” production was the norm for conservative fiscal firms, ordering parts as close to production time as possible to avoid excess inventory, reduce capacity. in the warehouse and cut spending first.

During the pandemic that moved into what some ridiculed as a “just in case” practice of storing chips.

“Hiding is a sign they think is important until one day they look at it and say,‘ Why do I have all this inventory? ’” Says Hutcheson, who predicts the chip’s supply and demand. more than 40 years. “It’s like toilet paper.”

The large-chip U-turn has been hit by inequality in business sectors, experts said. Large suppliers of chips to consumer electronics makers, especially low-end smartphones, are the hardest hit by the downturn, said Tristan Gerra, Baird’s senior analyst for semiconductors.

Nvidia Corp., the design giant whose graphics chips are used for gaming and cryptocurrency mining, will see “another drop in the shoe” as prices continue to fall, exacerbated by the recent crash in cryptocurrency market, Gerra said. Among those least affected by a glut are Apple Inc. suppliers such as the world’s leading chip factory Taiwan Semiconductor Manufacturing Co., according to Wedbush analyst Matt Bryson. Demand for Apple devices remains high, which is much higher in the market.

Chipmakers that supply automotive and data centers will also grow, according to Gerra, with relentless demand. “In power management, we’re going gangbusters,” said an executive at another global chipmaker who asked not to be identified.

However, for radio frequency chips used in smartphones, “we’re seeing a pullback due to handsets,” he added.

The executive chip factory is “redesigning” production lines to produce more power management chips for cars and fewer RF chips, which will ultimately help alleviate some of the auto’s shortcomings. chip, he said.

While industry executives and analysts can’t say how many surplus chips are in warehouses around the world, the first quarter inventory hit a record high among major electronics manufacturing service companies, as Jefferies analyst Mark Lipacis on a note on July 1. The last first quarter record was more than two decades ago, before the dotcom bubble burst.

Manufacturers may decide to use chips in warehouses instead of buying new ones, and cancel orders, Lipacis warns.

Auto chipmakers are safe right now, some analysts said. But that won’t last long.

In her September note Bernstein analyst Stacy Rasgon said automakers were ordering more chips than they needed, and that trend was continuing, she told Reuters.

That would create a problem if carmakers stop buying chips to use their stockpiles.

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